Corporate Governance

Musk to be investigated by SEC over tweets

F5258E32-BB7D-4C88-8983-84011F8CB8CB.png

CM has always thought that Elon Musk is the ultimate salesman. CM has also wrote that the biggest risk to being a short seller was then”cult” status of the company. On any rational investment grounds the stock is ridiculously priced but as the old adage goes, “the market can stay irrational longer than you can remain solvent!

Tesla is a car company that is worth more than GM, Ford & FiatChrysler combined. One that trades at 5x Daimler in valuation terms, a luxury competitor that is in the sweet spot of its product line up and rudely profitable.

Back in June, Musk bought $35mn worth of shares in Tesla. The whole idea that someone is willing to fork out $75bn on a whim seems somewhat implausible. Is it safe to assume that all of 100s of lawyers, bankers and brokers would need a little bit of time to prepare the necessary documentation to cement such a ridiculous sum? Or is money now just so free and easy that a billionaire deploys a vault full of cash loaded full of Zero Halliburtons into a private jet after a few phone calls?

SEC enforcement attorneys had already been gathering general information about Tesla’s public statements on manufacturing goals and sales targets. Now SEC attorneys are investigating whether his tweets about securing funding were factual.

CM is not accusing Musk of insider trading albeit as a matter of course the SEC should investigate when he knew about his mega financier. One wonders how it is that we know so little about the buyer, the term sheet, the question of shareholder approval and how “secure” it is? Taking it private will remove the lens of quarterly reporting but it doesn’t remove the fact of how dreadfully the company is run or how amateur production is. Even if public scrutiny is removed, the problems of profitability don’t disappear and the need for funds, credit ratings etc if he taps public markets for debt capital remain.

If Musk pulls it all off and the company becomes a roaring success then CM will gladly eat a whole humble pie and openly admit it was wrong.

As to the SEC investigation let’s hope it has learnt the lessons of its bumbling incompetency over Bernie Madoff and doesn’t miss anything that might be bleeding obvious.

Stupid is as stupid does

DE3DE6A2-4429-499C-9CCB-A25896E8E3B6.jpeg

That’s one small backward step for man. One giant backward step for women. What a foreign concept that some women might be smarter than men? Surely pursuing best in class healthcare means striving to grade students based on merit. Not so in Japan. The Tokyo Medical University was found to have deliberately marked down women in entrance exams to limit their numbers.

The scandal broke during an investigation into the admission of a ministry official’s son, who essentially bought his way in. He was given 20 extra points after failing the exam multiple times so he could pass. What a proud moment to know one has to buy influence to make up for a lack of ability.

It has been revealed that the share of female doctors passing Japan’s national medical exam has remained at about 30% for the last two decades.

Sadly class actions don’t produce much other than a token slap on the wrist. Of course all Japanese women just want to marry, become housewives and raise kids for their salarymen husbands. None should have ambition other than to serve their men. No wonder maid cafes do so well in Japan  – the girls say, “yes, my master!” in order to allow men with inferiority complexes to have fantasies of being dominant.

NYT hires fab new editor who hates “dumbass f*cking white people”

123DD437-73A8-4D02-9052-E57A1CAD00A8.jpeg

Zerohedge reports that The NY Times has hired a fab new addition in Sarah Jeong to the ranks of the board of editors. It has been unearthed that 48 months ago Jeong said some pretty incendiary things about white people. From a personal standpoint as a white person, CM is not in the least bit impacted or offended by her statements. Alas it is just words and free speech. On the contrary the tweets say more about Jeong than any dumbass f*cking white people.

Was Jeong not aware that 8 of the 12 board of editors are currently white? Not that the board’s racial identity should have any bearing on disgraceful bigotry displayed by her.

The only point at stake here is whether The NY Times will defend and maintain consistent standards it would certainly hold if a white editor raged on about people of other colour. This isn’t a rally or #boycott (please no more boycotts) to get Jeong sacked. On the contrary. In free market thinking the question is whether The NY Times exercises rational judgement and sees that from a commercial perspective defending the indefensible might not be good for growing the business or encouraging a shrinking pool of paying advertisers to rent more space?

After the election of Trump, the newspaper changed its slogan to “The truth is more important now than ever.” For someone to espouse such bitter hatred so candidly in social media forums which have a half life of infinity, her truths are for all to see. The truth in The NY Times’ slogan is also on display.

How could The NY Times possibly hope to uphold the highest levels of ethics and moral high ground by defending her? In her press blurb the paper is effusive with praise citing, “Sarah has guided readers through the digital world with verve and erudition, staying ahead of every turn on the vast beat that is the internet.“ It is also quite telling that Twitter didn’t think she broke the very standards that would see conservative voices banned for far less offensive tweets.

CM wonders what the Harvard Law School has to say about its deeply talented alumni who served as Editor of the Journal of Law and Gender? Perhaps she just missed the ethics classes because she was too busy battling to make sure the correct pronouns were used in the articles on identity politics.

Lucky for The NY Times, Jeong will remain in Portland meaning should they choose to uphold the highest levels of integrity the paper won’t be required to fork out her relocation costs. CM had higher hopes for the paper. When it hired a conservative columnist in Bret Stevens there was hope that there was an attempt to seek some balance. He spoke of the vile hatred of the left in his first column. Read it here. The outcome of Jeong will speak more about The NY Times defending the side rather than the principle.

Coles comes to its senses that the consumer is always right

3755BD83-2DFF-4198-AE38-6845C82AC437.jpeg

What rubbish! Literally! The plastic bag ban in supermarkets in Australia was only ever a sop to green madness based on spurious science. Coles and Woolworths didn’t consult customers as much as they claim they did. If they did, why has Coles started to provide them for free again? Could it be a consumer backlash? Let’s see how much more business Coles does as a result!

The idea of a spontaneous shop on the way home from work. Perhaps the sick wife has asked her husband to buy milk, bread, a sack of oranges and ice cream. People want convenience. That doesn’t absolve them of being responsible stewards in their disposal. CM reuses the bags for disposing rubbish. Why should CM be punished for the laziness of others?

In a nutshell it is further evidence of the true colors of the majority of consumers with respect to environmentalism. Just like people that buy SUVs and fly overseas on holidays. Most want others to do the “save the planet” thing on their behalf. Just ask Leo DiCaprio or Cate Blanchett. They’ll preach about our need to do our bit but are the first to board a private jet to go to the next film festival.

This Coles news made it to the Japanese press. Supermarket chain ‘OK Store’ charges ¥6 for a plastic bag or you can make a box from all of the packing the food arrives in which costs nothing. After packing your box you can recycle the cardboard in the paper bin. Simple.

Yet what is this constant penchant to boycott everything. A sort of collectivist pitchfork movement.  Why not just let consumers express their free choice? If Coles see consumers reject the restoration of plastic bags they’ll take them away just as quickly. Tired husbands forced to do an emergency shop for a sick wife don’t require social justice warriors to give evil glances on the bus.

For CM, the next shop WILL be at Coles.

 

Harley-Davidson to go into the Adventure category

9501CC3B-862C-4B5D-86A5-1D5904C494C6

Actually credit where credit is due. Harley maybe very late to the party but realizes it must be bold to survive in the long run. Adventure (ADV) bikes (think of them as 2-wheeled SUVs)  are one of the most popular motorcycle segments now due to versatility but the competition is fierce and only getting moreso. Harley plans to launch a 1250cc ADV bike in 2020.

It is unlikely to cause segment leader BMW to quake in its boots with respect to its best seller GS series although the question is can the Harley brand can carry any sales at all? At the luxury end BMW, KTM, Ducati, Triumph, Moto Guzzi and Aprilia all have ADV bikes. BMW & KTM are the sales chart leaders. BMW for inventing the segment and KTM for strapping a 160hp nuke to its expertise in off road and 17 straight wins in the Paris-Dakar.

It is fast becoming a horsepower war. BMW is looking to launch a 145-150hp 1250cc next year for the GS from the 125hp 1170cc twin it currently has to keep up with the competition.

Without a spec sheet it is hard to tell much about the Harley ADV. It looks heavy. Weight matters. The BMW is around 240kg. The KTM 210kg. Will the Harley keep it under 260kg?

Horsepower is not a Harley strong suit. You won’t find power in a Harley spec sheet at the dealer. Will it use a clump of lazy torqued Milwaukee pig iron for an engine? In a low slung cruiser one can get away with it but in a tall ADV bike, when negotiating goat tracks (that’s a wide belly pan!), traction, power delivery and how a bike carries its weight is crucial. Can Harley produce over 120hp from this 1250cc engine with flexibility across the rev range? Will it be chain driven? Shaft? Belt? These things matter to the ADV snobs.

The design of the ADV Harley is certainly bold. CM likes it although if you drop it that headlight unit sure looks expensive to replace. Like many SUVs never see more off-road than a gravel driveway, the most dirt tracking Harley ADVs will see might be some road repairs on Route 66. The Pan America name certainly rings of highway biased use.

The next thing will be price. Even before (and after) we have full specs can Harley launch the bike at a competitive price? Harley can’t just rock up into a segment it’s never been active in and demand the type of premium it’s cruisers carry. It’s top of the line CVO series can be $50,000. BMW is considered the premium offering in ADV. Luxury Italian brand Ducati tried to price it slightly north and was caned in the sales race. KTMs are priced slightly cheaper but BMW remains king and having owned one know exactly why. The BMW is good at absolutely EVERYTHING.

Harley has history in new ventures. It broke the mold decades ago and took a stab at sports bikes with the Buell brand, but it was an abject failure. Porsche was called into help develop the V-Rod engine some 18 years ago but that is no longer sold.

Harley also aims to launch electric bikes, smaller 250-500cc categories for Asian markets and a mid range 500-1250cc for new sport type street fighters. All looks margin crushing from a distance.

From an investor perspective the accountants will require a lot of volume to justify the R&D expense. The shares closed toward the lows on the announcement.

Without getting too Harvard MBA, Harley feels extension of product is vital. To a degree it is right. Unfortunately graveyards for such strategies are too commonplace. Few get it right. Buell was case in point. BMWs K1600 Bagger will flop because it was an excuse trying to find a home for its 1600cc 6-cylinder regardless of capabilities. Customers see through this.

Harley’s ADV will have distribution channels as it’s biggest weapon. It will have a hard time converting ADV faithful unless it offers something truly better at a competitive price. Otherwise it will gather dust on showroom floors.

Personally this ADV will probably do better than most think. It won’t get close to toppling the Beemer but there are enough quirky people out there who want to be different. Nice job Harley but can it turn groups profitably around? The last 5 years have been a disaster. The question is all this product arrives at a time when the economy is likely to turn south.

Why discontinue?

USFEDBS

This is a chart of the change in the US Fed balance sheet, a series that has just been discontinued. Is this because the Fed is about to step up its activity and offering wider disclosure on tapering activity might spook markets? Given that 72% of the growth in S&P earnings has been driven by buybacks since 2012, it stands to reason the market is not exactly providing the type of confidence inducing organic lift the index reflects. Bank of America revealed that “net buying of Tech sector in the 1H was entirely buyback-driven.” 

Kind of reminds CM of the day Bernanke’s Fed announced it would no longer report M3 money supply a year before the financial markets headed into the GFC. CM estimated on p.4 of a report several years ago that M3 money supply by 2018 on constant long-term growth rates would turn into around $35 trillion from the $10 trillion at the time it was discontinued.

M3Disc.png

Nothing to see here? Throw a deteriorating fixed income market with fewer buyers and corporates that have binged on cheap credit to fuel buybacks, it doesn’t look like the stuff dreams are made of. The chart below shows that quarterly pre-tax US profitability is struggling since 2011. Earnings (E) are not doing so well. It is by the grace of falling number of traded shares (S) that makes the EPS look flattering.

US Corp prof.png

We took the liberty of comparing corporate profitability since 1980 and correlating it to what Moody’s Baa rated corporate bond effective 10yr yields. An R-squared of almost 90% was returned.

US Moodys corp

Why not use the Aaa spread instead? Well we could do that but looking over the last decade the average corporate debt rating profile looks like this. We have seen a massive deterioration in credit ratings. If we look at the corporate profitability with Baa interest rates over the past decade, correlation climbs even higher.

D42A75BB-58A4-49A5-B084-32343877CFFF

We shouldn’t forget that the US Government is also drunk on debt, much of it arriving at a store near you. $1.5 trillion in US Treasuries needs refinancing this year and $8.4tn over the next 3.5 years. Couple that with a Japan & China pulling back on UST purchases and the Fed itself promising to taper (but now hide the results of) its balance sheet. So as an investor, would you prefer the relative safety of government debt or take a punt on paper next to junk heading into a tightening cycle?

E0F20948-4A5A-48F1-B8AF-06FA92EBAC7A

Discontinuation of series always carries a sense of deep cynicism for its true intention. It is not an onerous data set to cull. Sure we can fossick around and try to find it hidden in the archives of the Fed website but the idea is that they probably don’t want to publicise how much more they intend to flog.

US airlines tell China to take a hike over Taiwan

1774991E-7530-42E6-AED6-B1F04DB39A0A.png

Despite the immediate and characteristic folding by in-your-face virtue signaling Qantas and other airlines to remove the word “Taiwan” from the airline in-flight magazines and websites, American airline leaders have decided to tell China to go take a jump saying it is a matter for governments, not airlines to discuss such foreign policy matters. Full credit to China for pushing the boundaries of how powerful the rest of the world thinks it is by the speed of which they roll over and play dead. It doesn’t take much to envisage when the Chinese authorities start to demand ‘real’ things. While leaders in Australia mock the activities of Xi in the Pacific or the Maldives by the irrelevance of the size of free trade agreements to China, they completely overlook the strategic importance of the naval ports China is linking together across the globe.

Of course trivial demands to change maps in inflight magazines on the surface is a backhanded way for the Chinese to prioritize landing slots but the action below the waves is clear. Start with tiny demands and ratchet up the volume and see where the breaking point is. Authoritarian rule at its finest. Where have we seen this before?

Sadly the principle lost on many is that those nations/airlines that “stand for nothing, fall for anything