China

Ding dong the switch is dead

Morgan Stanley has finally lowered its bearish scenario on Tesla from $97 to $10. CM wrote in October 2017 that the shares based on production of 500,000 vehicles was worth no more than $28 (refer to report page 5). That was based on rosy scenarios. Sadly CM thinks Tesla will be bought for a song by the Chinese. Maybe $4.20 a share instead of $420 “funding secured” levels.

The stock breached $200 yesterday for the first time since late 2016.

Morgan Stanley analyst, Adam Jonas, has still kept its base case scenario at $230 per share. His bull case is $391.

Where is the conviction? To drop a bear case target by 90% must surely mean the base case is far lower than presently assumed.

Jonas must assume the bear case is actually the base case. Sell side brokers love to hide behind scenario analysis to cop out having to get off the fence. His compliance department probably prevents him from realizing $10 is his true heart.

Tesla was always playing in a market that it had no prior experience. It is not to say the products didn’t have promise. The problem was the execution. Too much senior management turnover, missed targets, poor quality and too many Tweets from Musk.

The amount of bad press arising from a lack of service centers has driven customers to moan on social media at its amateur approach. The fragile dreams of being an early adopter are being shattered. Cash burn remains high and deliveries remain low. Some pundits think Tesla orders are under real pressure in 2Q 2019.

The recent all share deal with Maxwell Technologies has seen those holders -20% since the transaction a few weeks ago. CM argued how a company with such revolutionary technology could sell itself for all shares in a debt-ridden loss making like Tesla? If the technology was of real value PE funds would have snapped it up or at the very least made a bid in cash. That none was made speaks volumes about what was bought.

All of the arguments hold true in the above link, “Tesla – 30 reasons why Tesla will be a bug on a windshield

Tesla below $200 after a successful cap raise is not a good sign. It’s the faithful slowly tipping out. Await another imaginary Musk-inspired growth engine to be announced shortly to try prop up the stock price. Yet the momentum will continue to sink. The market is losing confidence in Musk. The 1Q results were diabolically bad.

Major holder T Rowe Price has stampeded out the door. The stock is too risky. Musk is a brilliant salesman but he has bitten off more than he can chew.

CM always thought that Toyota selling its Tesla stake was a major sign. Acknowledging that under the hood the company possessed no technology that Toyota didn’t already own.

Watch the free fall. The Tesla stock will be below $100 by the year end.

(CM does not hold Tesla stock)

That sinking feeling?

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We are often told how robust the world economy is. Global trade tends to be a good indicator. Looking at the latest Clarkson’s December 2018 annual review, we can see that the number of shipyards that make the vessels (20,000dwt+) that look after global trade has slid from a peak of 306 in 2009 to 127. Newbuild orders have slid from 2,909 vessels to 708. Wärtsilä is anticipating a gradual recovery in contract new builds as high as 1,200 ships by 2022. Wishful thinking?

According to Clarksons, the global fleet of all types of commercial shipping is 50% larger than it was before the GFC despite the World Trade Organization saying growth in global trade for 2019 is expected to fall 2.9%. The WTO has fingers crossed for 2020. The charts in this WTO report show the sharp slowdown in freight in Q4 2018 and Jan 2019.

Germany’s five leading ship financiers reported outstanding ship-related loans of 59 billion euros at the end of 2016 with an average problem loan ratio of 37%. In recent years they have been busy reducing or selling off shipping portfolios. HSH Nordbank required a 10 billion euro bailout by its 85% owners, federal states Hamburg and Schleswig-Holstein. It ended up being swallowed by private equity and renamed Hamburg Commercial Bank. Nord LB was looking to bail in Bremer LB beyond the 54.8% it already owns. Bremer LB had to write off  €400m of its shipping portfolio.

China has been aggressive, filling the void left by the Germans with high leverage financing to support the longer-term objectives of the Belt & Road Initiative. One wonders whether China plans to spoil the market by squeezing a damaged sector further. It wasn’t so long ago that South Korea’s  Hanjin Shipping went bust.

BTIG reported that ship scrapping in Q1 2019 was up 35% to 107,000dwt. Ship owners tend to scrap ships if the cost of idling or operating them exceeds this. Note Capesize shipping rates have fallen to around $9,000/day well below the $25,000 breakeven rate. The bellwether Baltic Dry Index is 27% down year on year and 85% below the peak levels seen in 2009.

The shipping industry has been sick for a decade. The majors have been busy merging, cutting debt and right sizing. Unfortunately it is  still in a pickle. A global slowdown will only exacerbate the issues in the industry.

The one area that looks interesting is the scrubber makers (eg Alfa Laval, Valmet, Fuji Electric). There has been a sharp uptick in growth for retro-fitting pollution equipment to existing ships instead of buying new equipment. Sometimes the best investments come when industries that require massive consolidation hit breaking point.

Boeing 737 MAX-8 piñatas

The loss of life through any accident is tragic. Make no mistake. Yet if aviation authorities (AA) across the world were truly worried about the safety of the Boeing 737 MAX-8 they’d have grounded it after accident #1 when they’d learnt about the faulty AOA sensor issue. They could have issued Boeing with an immediate action to fix it. They didn’t. Just let the FAA do its work and adopted its resolutions. Now it appears they’ve merely followed the followers. It is as if they’ve felt social media pressure to cover their behind so as not be the last AA do so. It’s irrational. Think of it as aviation piñatas. Bashing with a blindfold.

China was the first to ground the plane. The stunt was in part a trade related issue because the FAA airworthiness directive wasn’t just issued inside a cornflakes packet and as the strictest aviation authority should carry weight. The FAA has said the evidence is not broad enough to justify a ban.

Having been a former aerospace analyst, this is the first time in a very long time CM can remember that a virtual global ban was put on any aircraft type. When Qantas flight QF32 (an Airbus A380) had an uncontained engine failure which ruptured the wing tanks and severing hydraulics, the airlines grounded their own planes as a safety measure, not the authorities. Singapore Airlines suspended its A380 flights for one day before resuming operations.

When AA587 crashed in Queens after the tail and engines sheared off, Airbus A300s weren’t summarily grounded. When AF447 crashed into the ocean off Brazil, A330s weren’t grounded as a precaution.

The Boeing 737-400 series had inert fuel tank issues where near empty scenarios could cause the vapor to ignite in the centre tank and lead to a deadly explosion. Several did explode. Some in the air. Some on the tarmac. These planes weren’t grounded. World aviation authorities, like Australia, issued advisories on how to ensure it doesn’t happen. Not knee jerk copy thy neighbor responses.

The list of 787 airworthiness directives (from fire issues, wings, flight controls to landing gear) stands at 52. FIFTY TWO. Sure a 787 has not crashed yet but where have the authorities been trying to ground the type until it has no ailments at all? Do they need a crash to rally into action? Or do they look at the issue on its individual merits? The 737 can fly without this AOA safely, which is why the FAA still allows its operation.

This seems to be follow the pattern of board governance today. Aviation authorities reacting with emotion, not data. Seemingly acting for fear of a twitter backlash rather than applying common sense to a problem and shutting out noise. Are social media trolls experts on aviation matters? Yet another “it’s better to be morally right than factually so” argument it would seem.

Maybe the biggest qualification is whether airlines ground them because passenger refuse to board 737 MAX-8s where they’re allowed to operate. However most passengers don’t look at the “registration plate” affixed to the top of the front left hand door jam as they board to see what type of plane they’re on. They don’t look at the safety placard in the seat pocket. Most certainly don’t pay attention to the cabin attendants during the pre flight safety instruction.

By the way, flight AA293 from Miami to Washington DC is scheduled to land 11 minutes early today. It’s a MAX-8. Passengers in America are prepared to put their faith in the FAA not the whims of social media activism led policy to unnecessarily ban something to appear virtuous.

Boeing 737 MAX-8 – FAA continues airworthiness directive

The Federal Aviation Administration (FAA) has issued a continued airworthiness directive (AD) notification for the Boeing 737 MAX-8 after the crash of flight ET302. Note there have been 15,342 ADs issued by the FAA. 46 have been issued in the last 60 days. While we probably don’t give it much thought when we board a flight, that’s how much scrutiny goes on behind the scenes.

As tragic as the preventable loss of life was, the FAA had issued training procedures on 7 November 2018 to overcome the angle of attack (AOA) problem post the Lion Air flight JT610 MAX-8 accident on 29 October 2018. Many airlines assured the FAA that their crews have been trained to handle the issue in case of malfunction.

Former NTSB member John Goglia noted that while many pilots have learned to fly aircraft with complex electronic aids, those in countries with less developed aviation industries have less experience flying without them.

The FAA views the MAX-8 as a safe aircraft provided the erroneous AOA data is dealt with correctly. Boeing will fix the problem to ensure the product’s reputation. To the FAA, if the AOA couldn’t be disabled then the aircraft would be grounded.

Note Boeing has 4,800 orders outstanding for the MAX type. Around 230 are in service. The aircraft is the most popular selling commercial jet plane worldwide.

It’s not the first time Boeing has had issues with the 737.

In 1991, the first of a series of rudder hard overs caused several crashes until one pilot managed to save his plane which suffered the same fault for investigators to understand the problem and rectify it.

As for air safety, US Census data points to an1 in 205,552 chance of dying in an aircraft vs. 1 in 4,050 dying as a cyclist, 1 in 1,086 risk of drowning and 1 in 102 in a car crash.

Sir David’s 22,000 disciples won’t be able to sustain frequent flyer mile status

Yes Sir David Attenborough, we’re doomed if we look at history of the very people in place to save us. Not withstanding the 22,000 climate change disciples who have flown to Katowice, Poland to pay homage at the altar of the UNIPCC to cling on to each other hearing about their inevitable extinction. What a shame that instead of embracing technology and live-streaming COP24 to help us mitigate impending disaster, government funded frequent flyer mile status of climate apparatchiks takes precedence to saving us from all of these dangerous CO2 emissions.

Apart from the 100% certainty of me being screened for explosives at Sydney Airport (yet again today), the other is that the growth in air travel suggests that more and more people are happy to save the planet, provided that someone else offsets on their behalf. CM has long argued this position. Our consumption patterns dictate the “true” state of care of the environment. It hasn’t stopped SUV sales dead in their tracks and last year the IATA forecast that the number of airline passengers is set to DOUBLE by 2030.  Hardly the actions of those frightened by climate change.

Oh but you can offset your carbon footprint! In its 2017 Annual Report, Qantas boasts,

We have the world’s largest airline offset program and have now been carbon offsetting for over 10 years. In 2016/17, we reached three million tonnes offset.”

Carbon calculators tend to work on the assumption of 0.158kg CO2/passenger kilometre.

In the last 10 years Qantas has flown around 1 trillion revenue passenger kilometres. While the literature in the annual report denotes one passenger offsets every 53 seconds, the mathematical reality is simple – 2% of miles are carbon offset. So that means that 98% of people couldn’t care less. Would dispensing with frequent flyer programs cut emissions? These loyalty programs by their very nature encourage more travel. The more you fly the more you can fly for free!  Surely the IPCC should scream for a ban here. Dispense with first, business and premium economy to maximise passenger loads each flight. Apologies for the preamble.

While the US is not a signatory to Paris, 19 of the G20 are. The irony is that the non-signatory nation has seen its total emissions fall while many of the others have not. What value the ink on a pledge? No sooner had President Macron thrown stones at America, that he’s backed down and postponed a fuel tax hike for 6 months to save his city from burning down. There it is in a nutshell. We’re told if we don’t act now we’re doomed. So 6 months is a long time in “immediate” speak. What we do know this is classic smoke and mirrors by Macron. In 6 months the fuel tax will be all but forgotten. Virtue signaling Exhibit A scrapped. Why doesn’t anyone in the media pick on China? It has promised to increase emissions out to 2030 and is a signatory.

Sir David should get cold chills lifting a rock on the recent saga surrounding the NATO signatories where we can learn how worthless pen strokes can be. In 2006, NATO Defence Ministers agreed to commit a minimum of 2% of their Gross Domestic Product (GDP) to defence spending. This guideline, according to NATO,  “principally serves as an indicator of a country’s political will to contribute to the Alliance’s common defence efforts.” In 2017, only 5 of the 28 members outside the US have met the 2% threshold – Greece, Estonia, UK, Romania & Poland in that order. Despite Greece’s economic problems elsewhere, it manages to honour the deal. NATO Secretary General Jens Stoltenberg said “the majority [not all] of allies now have plans to do so by 2024.” 3 more are expected to hit the target in 2018. So for all the good will in the world, is POTUS wrong to call the other 19 members slackers that ride off the US taxpayer when so many of them are only likely to hit the target 18 years after ‘committing’ to it?

Alas, who doesn’t want to breathe clean air? The question is once all of the hysteria of 100m sea rises, forest fires (sharply down from 70 years ago & 90% caused by arson or accidents), hurricanes (nothing extraordinary in the data to show increases in ferocity) or sinking islands (sorry 80% of Pacific atolls/islands are stable or rising) are properly analysed what is the most efficient way to get there? Even Turkey wants to be downgraded to a developing nation in order to benefit from wealth redistribution on climate.

What a masterstroke if signatories to Paris are prepared to take on America’s share of saving the planet. American taxpayers can feel happy in the knowledge that other nations are paying for their NATO commitments by rebating them with tax credits on climate, all the while ruining their domestic competitiveness along the way.  Why does Trump need to Make America Great Again, when the majority of nations are prepared to do it for him? Economist Paul Krugman shouldn’t be calling climate skeptics “sinners” but “saints”

It costs HOW MUCH?

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The mind boggles. War is expensive to conduct. Once wars finish, the cost of looking after veterans is massive. In 2000, the Department of Veteran Affairs (VA) in America spent $43.6bn to look after returned servicemen and women. In 2020 it is expected to exceed $212bn (c. 5x), the equivalent of what the Chinese currently spends on its military.  Digging deeper into the data reveals that the cost of the aftermath of Operation Iraqi Freedom (OIF), Operation Enduring Freedom (OEF) and Operation New Dawn (OND) on veteran treatment keeps growing in a straight line.

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Total obligations for OIF/OEF/OND patients has grown 19-fold in the last 14 years to over $7bn. Total veterans from those campaigns now totals 965,000 and is expected to hit 1.1mn by 2020. Cost per veteran patient over the 2006-2020 period will virtually treble.

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Expenditure on prosthetic devices (e.g. limbs, hearing aids) has near as makes no difference quadrupled in that period.

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Spending on pharmaceutical products is up 1.9x since 2006.

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Drugs such as Oxycontin which contain opioids have found their way to creating problems in the US armed forces. 15% of Army troops admitted to taking illicit drugs (cocaine, heroin, marijuana) and opioids back in 2008.

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Spending on programs to prevent substance abuse is up 1.8x since 2006.

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The VA notes key clinical metric trends from Quarter Four of 2012 to Quarter Four of 2017 show:

• 67% reduction in Veterans receiving opioid and benzodiazepine together;
• 44% reduction in Veterans on long-term opioid therapy (> to 90 days);
• 38% reduction in Veterans receiving opioids;• 56% reduction in Veterans receiving > 100 Morphine Equivalent Daily Dose;
• 51% increase in Veterans on long-term opioid therapy with a Urine Drug Screen
(UDS) completed within last year to help guide treatment decisions.

Spending on mental health programs is up almost 4x since 2006. The VA plans to promote the development of skills in VA providers to diagnose and assess PTSD
by developing a computer-based training using simulated virtual patient
technology that will allow clinicians to practice and receive customizable feedback
on giving CAPS-5 to a lifelike virtual patient.

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The 2019 VA Budget requests $8.6 billion for Veterans’ mental health services, an increase of 5.8% above the 2018 current estimate. It also includes $190 million for suicide
prevention outreach. VA recognizes that Veterans are at an increased risk for suicide and
implemented a national suicide prevention strategy to address this crisis. Veteran suicide in the US is at a 22/day clip.

The price of freedom. All said and told the US over the last 20 years will have spent the equivalent of $2.476 trillion with a “T” on veterans. That is the equivalent of one entire year of UK GDP.

Smart technologies are an absolute must for the VA. The cost of veteran health is the equivalent of 29% of what the US spends on defence, up from 14.8% two decades ago. Asking for yearly increases is a band aid solution.

How well do Americans know their Defense budget?

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The US spends more than the next 9 countries combined when it comes to defence. What is probably lost on many Americans is the spiraling cost of funding the veterans who served. The US is forecast in 2020 to spend almost as much on the Dept of Veterans Affairs (VA) as China does on military spending. The direct cost of wars in Iraq and Afghanistan has driven the indirect costs of treating those who served almost 5-fold since the war began. US politicians have passed increase after increase.  Have these increases been thought of in context of the trend? Or do annual increases just get signed off as a reflex action?

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If we put the VA budget next to the defence budget, the former has grown from 14.8% of the latter to around 29% between 2000 and 2020. The number of veterans receiving disability compensation has grown 2 million in 2000 to 4.3 million in 2016. A total of 7.2 million veterans are actively seeking services or payments from the VA, up from 5.5 million in 2000.

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Spending per veteran by priority group also reveals sharply higher costs. This is not an exhaustive list of priorities, but the main 7.

Priority 1

• Veterans with VA-rated service-connected disabilities 50% or more disabling
• Veterans determined by VA to be unemployable due to service-connected conditions.

Priority 2

• Veterans with VA-rated service-connected disabilities 30% or 40% disabling

Priority 3

• Veterans who are Former Prisoners of War (POWs)
• Veterans awarded a Purple Heart medal
• Veterans whose discharge was for a disability that was incurred or aggravated in the line of duty
• Veterans with VA-rated service-connected disabilities 10% or 20% disabling
• Veterans awarded special eligibility classification under Title 38, U.S.C., § 1151, “benefits for individuals disabled by treatment or vocational rehabilitation
• Veterans awarded the Medal Of Honor (MOH)

Priority 4

• Veterans who are receiving aid and attendance or housebound benefits from VA
• Veterans who have been determined by VA to be catastrophically disabled

Priority 5

• Non service-connected Veterans and non-compensable service-connected Veterans rated 0% disabled by VA with annual income below the VA’s and geographically (based on your resident zip code) adjusted income limits
• Veterans receiving VA pension benefits
• Veterans eligible for Medicaid programs

Priority 6

• Compensable 0% service-connected Veterans.
• Veterans exposed to ionizing radiation during atmospheric testing or during the occupation of Hiroshima and Nagasaki.
• Project 112/SHAD participants.
• Veterans who served in the Republic of Vietnam between January 9, 1962, and May 7, 1975.
• Veterans of the Persian Gulf War who served between August 2, 1990, and November 11, 1998.
• Veterans who served on active duty at Camp Lejeune for at least 30 days between August 1, 1953, and December 31, 1987.
• Currently enrolled Veterans and new enrollees who served in a theater of combat operations after November 11, 1998 and those who were discharged from active duty on or after January 28, 2003, are eligible for the enhanced benefits for five years post discharge.

Priority 7

• Veterans with gross household income below the geographically-adjusted income limits for their resident location and who agree to pay copays.

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Countries have an obligation to look after the troops that sustain injury, physical, mental or otherwise. The question is whether politicians are cottoning on to the mounting relative increase in healing the veteran community to the spending on weapons of war?

There are 19.6 million veterans in the US. By 2045 this is expected to dip below 12 million. With 2.1 million serving active duty military personnel and reserves, the overall costs of healing may not come down anytime soon.

What it does say is that there is a massive need to work out how to reduce the costs to the VA without impeding improving healthcare and benefits for veterans.