Accounts Receivable

Kobe ‘Steal’ – will the market referee wave a red card at what looks a lot like insider trading?

6B872830-46AE-448A-977C-D953E4BEEF66.jpeg

If the referee caught Kobe Steel’s (5406) rugby team up to such foul play it is likely that players would be red carded. While unconfirmed speculation at the moment, it would appear that since September 21st Kobe Steel shares came under heavy selling pressure in what a seasoned market punter might suspect looks like insider trading via aggressive short selling. 7 straight negative candle sticks. Kobe Steel spilled the ball on its data manipulation on October 8th.

This would not be the first time that a broker conspired with a fund to short sell a stock ahead of a negative release on insider information where several weeks later news broke and sent the shares collapsing. This is the current action of Kobe Steel shares.

3913F6FB-F096-4E8A-BBD6-5CA21DB375B2.jpeg

So excluding borrowing costs or any leverage, if one had managed to short sell Kobe Steel at 1350 (on Sep 21) and brought back at today’s prices a quick fire 53% return would be gained.

The important question is whether the regulator will investigate any potential foul play when looking at the video replay. I will be asking this question directly to the Financial Services Agency (FSA) as I have been invited the regulator to give a speech on ways to improve Japanese corporate governance in a few weeks time.

This won’t be just a beat up of Japan’s corporate governance as foreign corporates have made countless scandals post the introduction of Sarbanes Oxley in 2002.  However it will aim to be a realistic overview of tolerating what seems to be endless preventable insider trading scams with paltry penalties of $500 and a slap on the wrists with a feather duster.

Until serious punishments for flagrant market manipulation are thrust front and centre in front of bewildered and annoyed (foreign) investors, the cynicism will remain that Japan is not a safe place to invest. Remember insider trading is effectively fraud. Perhaps your pension fund owns Kobe Steel in a global portfolio meaning that some shady investor has stolen your retirement to feather his or her nest.

Perhaps I should thank Kobe Steel for getting dirty in the ruck area to help the final presentation draft.

7C59A579-E1A8-42A6-8A44-07DF955D5B01.jpeg

The McTurnbull Burger – 2017 budget that says ‘waistline be damned!’

mcturnbull

Remember the Big Mac jingo? “Two all beef patties, special sauce, lettuce, cheese, pickles,  onions on a sesame seed bun?”  Well the 2017 budget From the Coalition might as well be called the super sized McTurnbull Burger. Two all thief parties, special porkies, levies, fees, spun on a $600bn dollar bomb. While the government needed to introduce a vegan budget of lentils, tofu and alfalfa to get the country’s nutrition properly sorted they’ve said waistline be damned. Morgan Spurlock couldn’t keep up with this super sized meal. As my wise sage Stu told me last week, “About as well-timed as Mining Super Profits tax – ding ding ding – top of the banking cycle just called by inept bureaucrats”

If people wanted a tax and spend party they’d have voted Labor. In a desperate attempt to supersize the meal they’ve made of the economy since Turnbull took office the debt ceiling will be raised. Wage growth has slowed for the past 5 years from 4% to under 2% according to the RBA. Throw higher Medicare on top why not?!. Cost of living is soaring. So let’s look at the extra calories they’ll inevitably load on the taxpayer.

1) Let’s tax the big 4 banks. That’ll work. What will they do as responsible shareholder owned organizations? Pass those costs straight on to the tapped out borrower where 1/3 mortgagees already under strain and 25% odd have less than a month of buffer savings. NAB already jacked interest only loans 50bps.

2) allowing retirees to park $300,000 tax free into super if they downsize their empty nest. Wow! So sell your $5mn waterfront property so you can park $300k tax free into superannuation. Can see those Mosmanites queue up to move to Punchbowl to retire. Hopefully the $1mn fibro former council shack the Punchbowl pensioner flips will mean they can move to a $500,000 demountable in Casula in order to free up the property market for the first home buyer who is getting stung with higher interest rates, .

3) Australia has a property bubble. The Reserve Bank has recently had an epiphany where they’re afraid to raise rates to crash the housing market and they can’t cut because they’ll fire it up more. Allowing creative superannuation deposit schemes (max $30,000 per person & $15k/year) to help with a deposit only doubles down on encouraging first home buyers to get levered up at the top of the market using a system designed to build a safety net for retirement. When governments start abusing sensible policies in ways it was never designed for then look out for trouble down the line. This doesn’t help first home buyers it just pushes up the hurdle to enter.

4) Australia’s credit rating is on the block. Australia’s main banks are 40% wholesale financed meaning they have to go out into the market unlike Japanese banks which are almost 100% funded by their depositors. Aussie banks could see a rise in their cost of funds which the RBA could do little to avoid. That will put a huge dent in the retail consumption figures.

5) speaking of credit cards. Have people noticed that average credit card limits have not budged in 7 years. If banks are confident in the ability of consumers to repay debt, they’d let out the limits to encourage them to splash out! Not so – see here for more details.

6) Infrastructure – I live in the land of big infrastructure. Jobs creation schemes which mostly never recover the costs – especially regional rail. The Sydney-Melbourne bullet train makes absolute sense. We only need look at the submarines to know that waste will be a reality.

7) small business – tax concessions of $20,000 not much to write home about. Small businesses thrive on a robust economy which is unlikely to occur given the backdrop. Once again this budget is based on rosy assumptions and you can bet your bottom dollar Australia won’t be back in surplus by 2021.

Some  media are talking of Turnbull & Morrison stealing the thunder of the Labor Party, providing a budget more akin to their platform. Sadly I disagree that this legitimizes Turnbull. It totally alienates his base, what is left of it. Tax the rich, give to the poor. Moreover voters see through the veneer. The stench of the Coalition is so on the nose that without ditching Turnbull they have no chance of keeping office. Labor is not much better and One Nation and other independents will hoover up disaffected voters by effectively letting the others dance around the petty identity political correctness nonsense.

In the end the McTurnbull Burger meal will look like the usual finished product which resembles nothing like the picture you see on the menu. A flattened combination of squished mush, soggy over-salted fries and a large Coke where the cup is 90% ice. Yep, the Coalition has spat between your buns too. This is a meal that won’t get voters queuing up for more. Well at least we know Turnbull remembers that smiles and selfies are free after all ‘he’s lovin’ it‘! After all virtue signaling is all that matters. All this to arrest some shoddy poll numbers which will unlikely last more than one week.

A reminder of credit ratings and ability to pay – both awful

IMG_2448

An astute market’s person sent me an interesting chart (above) from the IMF highlighting that US companies have added $7.8t in debt & other liabilities since 2010. The ability to cover interest payments is now at the weakest level since 2008 crisis. When looking at credit ratings for US companies over the last decade, the deterioration has been marked. For all of the turbo charged low interest rate environment set by central banks, the ‘real’ state of corporate financial health on aggregate continues to worsen despite near full employment, record level equity markets and every other word of encouragement from our politicians. However if this is the state of the corporate sector at arguably the sweet spot of the economic cycle I shudder to think the state of potential bankruptcies that will come when the cycle takes a turn for the worse. This is a very bad sign.

IMG_0523.PNG

New cars for 40% off

IMG_9620.PNG

Looking for a new car? This maybe last year’s model but it’s new and 40% off. I recall seeing such lunatic deals the last time we headed for a collapse in auto sales. Mac Haik Ford in Houston is practically giving it away.  Even some of the 2017 models are getting chunky discounts.

Jim Glover Chevy near Arkansas River is also trying to shift 2016 metal. Why buy used when a 2016 new Malibu is $7,000 off?

IMG_9621.PNG

Chrysler is also chucking discounts left, right and centre. Northwest Dodge Houston is taking $14,000 off new Rams.

IMG_9622.PNG

ZeroHedge wrote:

If GM piles on incentives at this rate three months in a row, it would spend nearly $4 billion on incentives, in just that quarter, just in the US alone. How much dough is that for GM? In Q1 2015, GM reported global net income of $2.0 billion. In Q1 2015, it reported global net income of $0.9 billion. These incentives can eat an automaker’s lunch in no time. And they did in the years before the industry collapsed during the Great Recession.”

The National Automotive Dealer Association (NADA), a division of JD Power wrote,

Manufacturers dialed up incentive spending 18% last month to help reduce new vehicle inventory levels that are at a decade-plus high.”

IMG_0474.PNG

The NADA Used Car Guide’s “seasonally adjusted used vehicle price index fell for the eighth straight month, declining 3.8% from January to 110.1. The drop was by far the worst recorded for any month since November 2008 as the result of a recession-related 5.6% tumble. February’s index gure was also 8% below February 2016’s 119.4 result and marked the index’s lowest level since September 2010.”

WolfStreet noted “Used vehicle wholesale prices determine the value of the collateral for $1.11 trillion in auto loans that have boomed on higher prices, higher unit sales, longer maturities (the average hit a new record of 66.5 months in Q4), and higher loan-to-value ratios (negative equity)”

IMG_0475.PNG

It doesn’t bode well.

Toshiba should be left to rot as a warning to others like Captain Kidd. Sadly Japan Inc is Captain Kidding

IMG_0287.JPG

In the olden days, pirates and criminals were left to rot and die as a gruesome warning to others. Japan should adopt the same policy for corporates which no longer reserve the right to function. I once conducted a study that showed that Intel by itself made more net profit over 25 years in aggregate than the largest 20 Japanese technology firms combined over the same period. Yes, that is right Intel made 40% more net profit than Sony, Panasonic, Toshiba, Mitsubishi Electric, Nidec, Canon, NEC, TDK, Hoya, Nikon, Kyocera, Ricoh, Olympus, Konica Minolta, Sharp, Tokyo Electron, Advantest, Fuji Film, Ibiden, Fujitsu and Brother combined.

IMG_0289.PNG

Fuji Film once boasted that it was a better company than Kodak on the announcement of its bankruptcy. The reality is that as a shareholder the decade preceding Kodak’s bankruptcy had higher total returns (dividends, buybacks) than one who held Fuji Film. Not exactly a proud boast to say you’re superior only in terms of survival. That is the problem many corporates face. They do not properly understand the importance of shareholders.

IMG_0288.PNG

I have lived in Japan for too long to know that foreign investors remain right to hold such a negative outlook on corporate governance here despite the introduction of the Corporate Governance Code I wrote about in 2015. Toshiba is without a doubt a poorly run company that has become an uncompetitive mess of its own doing. It is decades of poor business decisions that has led to its demise. Not bad luck . The way the government is trying to protect Toshiba and its 200,000 employees is exactly why foreigners will stay away. All such rearguard actions do is send a strong message to all other large Japanese corporates that there is a safety net if they screw up.

Toshiba tried to appeal to investors after the initial accounting scandal that a majority of independent directors would prevent it happening again. Reality is that they were completely ineffective. To that point the Japanese stock exchange (JPX) asked me to fill in a survey on what I thought of corporate governance and whether it should be made mandatory instead of ‘comply or explain’. 98% of listed corporates have volunteered to hire two independent directors so I asked why would you make law what almost all are already in step with? Talk about not understanding what the point of shareholder needs are from the exchange itself. It is embarrassing. I made the point that the “quality” of independent directors was most important. I wrote in the corporate governance report the following,

“Companies must focus on qualitative aspects when hiring independent directors over quantitative parameters. Soft options to meet minimum regulatory requirements to protect the status quo is a recipe for failure. Independent directors should not be viewed as an ‘unavoidable cost’ but as a ‘wise investment’ for firms. Which company would rationally choose inferior staff for its operations? Would an airline actively seek unqualified pilots to fly its passengers? That is not the way of sustaining good reputation in the long run.”

Toshiba is to all intents and purposes insolvent. It bit off way more than it could chew in nuclear. Westinghouse looked a huge boon at the time and many analysts fawned over the Japanese giant becoming a monster player in nuke power. Now the massive costs of building plants, the delays, the requirement for trained personnel to build them etc has become too much to bear,. Yet the government sees the banks propping it up through syndicated convoy support is the way forward.

I wrote in Jan 2016 about Toshiba as its market cap slipped below Y1 trillion.

“I once joked soon after Lehman shock that Apple’s overnight move of 5% was the equivalent of the vanquished Toshiba market cap. Now Apple only needs to move 1.29% to increase / decrease the equivalent amount of Toshiba’s mkt-cap. It shows just how far the Japanese tech giant (?) has slipped. When we look at reality, the accounting scandal, the appointment of 50%+ independent directors on the board and the likelihood of having to write down goodwill, the former tech giant faces further woes. Toshiba is in dire need of a ‘crisis’ manager to restore lost fortunes.”

I also argued in the same note:

“Toshiba may be trimming 16,000 odd staff into next fiscal year. Interestingly the decision to cut 6,800 employees from their overseas businesses highlights once again that domestic social harmony takes a front seat to shareholders. We’re not saying the action is not well intentioned but in a sense it is hardly the thing which will help get the supertanker turned around in the required time. Interestingly Nidec’s Nagamori has offered to hire software, communications and robotics engineers from Sharp and Toshiba to ‘help’. So the best engineers from Toshiba and Sharp will sign up for voluntary redundancy (aka tax effective bonus) and land a job with arguably one of the most profit focused Japanese tech companies, further gutting the ‘best assets’ from the ailing companies.”

Yet look at what Toshiba tried to do with fixing its ailing PC business. It’s independent directors voted to copy what abysmally failed in mobile phones, even worse teaming with an old partner. As I also wrote,

“One would have hoped that the independence of the majority of the board would lead to a heightened sense of urgency and crisis management. The recent news is that Toshiba is in talks with Fujitsu again to merge their loss making PC units where the two share 6% of the global market…There is a lot of precedent suggesting that this is a fruitless exercise. As one of my colleagues put it best, “two drowning men together don’t make a swimmer”. One would hope that Toshiba’s revived sense of corporate governance would see its board seek more severe action…

img_0290

 

“Japanese mobile handset makers have consolidated. Toshiba teamed with Fujitsu (surely a lesson in what a poor decision that has been), NEC with Casio and Hitachi, while Sony (albeit teamed with Ericsson until they merged) has had a rear guard action. Sanyo sold its handset business to Kyocera. Mitsubishi Electric just quit altogether in 2008. I remember a time when Japanese clam-shell phones were amazing. Friends from foreign lands would marvel at the designs, light weight and features versus the clunky Nokia and Motorola offerings of the time. They also were stumped at how these devices could get so much battery life. Alas, Japan kept them largely from overseas markets leaving them without the little scale efficiency from expansion abroad.”

img_0291

“As smartphones have caught on, Japanese handset makers have been left further in the dust. Sony has the highest global share among Japanese brands at 1.7% (Q1 2015), however even in the domestic market, Apple and Samsung command the leading shares. Japan’s market share in mobile phones globally has slid from 15% a decade ago to less than 4% in 2012. Japanese maker’s global share of flat screen TVs slump from 45% to around 20% over the same period. What magic can a Toshiba-Fujitsu PC alliance make?”

Alas Toshiba dithered and eventually knew that the government would throw out the emergency airbag to cushion its fall. How does throwing hands in the air and not taking more drastic action (selling cross shareholdings etc) sit with best in practice corporate governance and protecting shareholders’ best interests? Not a chance.

What Japan Inc should do is allow it to fail. Let the free market decide what assets they want. If Westinghouse is worth something to Hitachi or some other maker then so be it. Sharp was sold to a Taiwanese maker.  If Toshiba’s NAND flash business is only worth X to a foreigner or Y to a Japanese then that is reality. The market is there to match buyers and sellers. Somehow I fear that there is a ‘Hinomaru’ type structure that will form to absorb the chip businesses of several Japanese companies to form a burdensome partnership to appeal to social goals.

The government must understand that listed corporates are not there for national service. If that is the wish of the state then it should nationalise Toshiba. I’m sure the BoJ will be glad to add more toxic waste to its massive balance sheet which even dwarfs America. There is no way that foreign investors can glean any hope for true reform if protecting zombified atrophied elephants continues.

Japan is a shame culture. How is it that it doesn’t see that protecting Toshiba is in fact seen as so shameful to foreign investors and increasingly Japanese taxpayers.

Toshiba has till March 14th to find a solution before it gets put on the scheduled for delisting board. That I’d argue is even more embarrassing.

Dire Straits – why you need to worry about the global economy & it is nothing to do with Brexit

central banks gun

Better to sit down. We will be covering some pretty bleak conclusions in this report. The world’s central banks have hit stall speed. They have lost control and do not have enough altitude to recover. How bad can things get? There are two things at play here. One is economic (explicitly monetary) policy. The other is social reality (explicitly hardship). Both have become dysfunctional. Reckless central bank monetary expansion sold behind the banner of ‘nothing to see here’ has backfired. Money velocity (or the power of money) across the globe is plummeting to record lows. While the GFC was easily avoidable the post disaster mop up operation consists of printing our way out of the disastrous debt pile by inflating it away. Even negative interest rates leave inflation well below targets. Deflation still prevails. Poverty and post-GFC destitution has reached boiling point. When people feel robbed of their identity and increasingly their democracy we should not be surprised to see the rise of nationalism and non mainstream candidates and sadly violence, especially in Europe. This social disruption should not be ignored because the experimental financial engineering that was supposed to wiggle us from the bondage of moral hazard has had the complete opposite effect.

Here are 7 things to ponder;

  • A recent US Federal Reserve survey found that 47% of Americans couldn’t raise $400 in emergency cash were the need to arise. 5% unemployment rate belies financial difficulties.
  • A bank survey in Australia showed 50% of people wouldn’t be able to meet their financial obligations if unemployed for more than 3 months. Housing price to income ratio almost twice the level pre-GFC. Private debt: GDP ratio at 160%.Credit rating downgrade imminent.
  • 60% of ETF purchases in Japan and c. 100% of sovereign bond purchases are bought by the Bank of Japan which now owns 38% of outstanding government debt. 15 year Japanese government bonds now yield -0.004%. Japan’s move to negative rates has caused a run on sales of mini-vaults as people look to store their own cash.
  • M2/M3 money velocity has hit all time lows in the US, ECB, Australia, China & Japan.
  • Italian banks non performing loans (NPLs) are approaching 20% and as high as 50% in the south of the country. The ECB is breaching their own covenants to hide the mess. Belgian Optima Bank has just been shut down for not being able to meet obligations. Many more?
  • Over 25% of those in the EU live below the poverty line and youth unemployment is c.25% with long term unemployment now 50%. In Greece those numbers are 36%, 58% and 72%.
  • China’s industrial sector among others shows clear signs of recording sales without much hope of being paid with receivables ballooning in some cases leaping to over 5 years of reported revenue pointing to a sharp uptick in corporate debt insolvency & NPLs to follow.

China’s corp debt 145% of GDP

China industry

Seeems like the IMF shares my concerns on China and its corporate debt load. As the industrial companies above highlight, the rising accounts receivable only serve to highlight that money is not ‘flowing’. Orders may be taken and sales booked but if accounts receivable aren’t collected after 12 months one has to wonder if they will ever be repaid. Hence the corporate debt held by some companies may well be looking riskier.

The IMF are estimating 7% of GDP is bad loans but that number doesn’t hide a lot of the shadow banking existing in China. The PBOC chairman has long warned of this corp sector debt build up. Even efforts to tidy up the balance sheets of the banks with debt for equity swaps etc is not working well.

I remember much like Japan, the bad news about reality was drip fed out over years until it became bearable no more. The question is the rest of the world is in awful shape so there is little wiggle room for China to bluff its way through this.