Virtue signaling fails again at the ballot box


No matter how dreadful the Liberals under Turnbull are at a federal level, South Australians realized that the 16 years of Labor in SA led them to the slowest growth, highest unemployment and most expensive electricity prices in the nation thanks to the loony renewables policy of the Weatherill government.  He ran a platform to double down on the failed policy that led to multiple state wide black outs. Common sense prevailed and he was rightly booted.

No amount of blowing up coal fired power stations or smug smiles while shaking hands with Elon Musk to make out as if wasting $560mn more of taxpayers money was intentional, could sway the hearts of the electorate.

The Libs gained a majority on its own right with 25 seats. Labor set to lose 5 seats to 18. The Greens lost more ground in SA, slipping over 2% to 6.6%. No seats. At the sharp edge of the wedge, a growing number of constituents don’t need the virtue signaling. They want sustainable jobs, sensible stewardship of their tax dollars and reliable, affordable electricity.

Whether the Libs can actually deliver is another question but Premier Weatherill’s flagrant failure came home to roost. However Turnbull mustn’t take these state victories as an endorsement for the coalition at the federal level. He’s still badly burnt toast.

Fasten your seatbelts!


The “Fasten your seatbelts” edition (March 6, 2018) of the High-Tech Strategist by Fred Hickey is best read with antidepressants or a stiff drink. To be honest I hadn’t seen a copy of this research for at least 5 years. Today I’ve read it three times hoping I haven’t missed or misread anything. It is well reasoned and well argued. I would even admit to there being confirmation bias on my side but it is compelling. Usually confirmation bias is a worrying sign although prevailing sentiment or group think, it isn’t!

Perhaps the scariest claim in his report is a survey that showed 75% of asset managers have not experienced the tech bubble collapse in 2000. So their only reference point is one where central banks manipulated the outcome in 2007/8. S&P fell around 56% peak to trough. I often like to say that an optimist is a pessimist with experience. A lot of experienced punters have quit the industry post Lehman’s collapse, hollowing out a lot of talent. That is not to disparage many of the modern day punters but it does experience is a hard teacher because one gets the test first and the lesson afterwards.

Hickey cites an interview with Paul Tudor Jones who said that the new Fed Chairman Powell has a situation not unlike “General George Custer before the battle of the Little Bighorn” (aka Custer’s Last Stand). He spoke of $1.5 trillion in US Treasuries requiring refinancing this year. CM wrote that $8.4 trillion required refinancing in 4 years. In any event, with the Fed tapering (i.e. selling their bonds) couple with China and Japan feeling less willing to step up to the plate he conservatively sees 10yr rates hit 3.75% (now 2.8%) and 30 years rise above 4.5%. Now if we tally the $65 trillion public, private and corporate (worst average credit ratings in a decade) debt load in America and overlay that with a rising interest rate market things will get nasty. Not to mention the $9 trillion shortfall in public pensions.

Perhaps the best statistic was the surge in the number of articles which contained ‘buy-the-dip’ to an all time record. Such lexicon is often used to explain away bad news. It is almost as useless as saying there were more sellers than buyers to explain away a market sell off. In any event closing one’s eyes is a strategy.

Hickey runs through the steps leading up to and during the bear market that followed the tech bubble collapse. It was utter carnage. Bell wether blue chips like Cisco fell 88% from the peak. Oracle -83%. Intel -82%. Sun Microsystems fell 96%.

To cut a long story short, assets (bonds, equities and property) are overvalued. The Bitcoin bubble and consequent collapse have stark warnings that he saw in 2000. He recommends Gold, Gold stocks (which he claims are selling at deeper discounts than the bear market bottom) Silver, index and stock put options (Apple, Tesla, NVidia & Amazon) and cash. Can’t say CM’s portfolio is too dissimilar.

As Hickey says, “fasten your seatbelts

$8.4 trillion of the $21 trillion in US debt matures in 4 years. What could possibly go wrong?

E0F20948-4A5A-48F1-B8AF-06FA92EBAC7AWith a US Fed openly stating it is looking to prune its bloated balance sheet by around $2 trillion, it seems that $8.4 trillion of that debt held by the public matures within the next 4 years according to the US Treasury. To that end, debt maturing in the next 10 years totals $12.233 trillion. It needs to be ‘rolled over’. The national debt pile has jumped $1 trillion in the last 6 months. After the GFC and an overly accommodative central bank, the Treasury took advantage of this free money. Under President Obama, the debt doubled. That’s right, debt in his 8 years equaled that of the previous 43 administrations combined. Most of it was short term meaning the mop up operation starts earlier.

While there is little doubt this $8.4 trillion will be recycled, the question is at what price. With rising rates and a Fed back-pedaling one would expect the interest bill can only lift. At the moment the US federal government pays around $457 billion p.a. in interest alone. Average interest rates rose for the first time since 2006. Were average rates to climb back to 2007 levels then the interest bill alone would surpass $1 trillion.


This global aversion to tightening belts continues. Many US corporations have taken the same approach to their balance sheets as the government as pointed out in the previous example on GE. Lever up and be damned with the credit rating as the spreads have been almost irrelevant to higher rated paper. It has been a financially credible decision to lower WACC and increase ROE provided one didn’t lose control and overdose on free money. However the relatively short duration on corporate debt is facing a similar refinancing cliff as the US government.

All this cumulative debt needing refinancing while credit ratings are on average the worst they’ve ever been in a rising interest rate environment coupled with a bubble in bonds while a growing number of these levered consumer and industrial stocks have negative equity. What could possibly go wrong?

Do we see the Fed reverse its decision and embark on more QE? Indeed to do such a thing would tank the dollar and send the yen back towards the 70s to the US$. Interesting times ahead. Throw on the $7 trillion shortfall in state public pension liabilities and watch the fire from the other side of the river. Finally some university think tank has come out saying that wiping out the $1.5 trillion in student debt would be ‘stimulatory’ to the economy adding 1.5 million jobs. What a world we live in when we get to walk away from responsibility and accountability.

GE’s Goodwill is Electric

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It seems that GE’s woes are going from bad to worse. While the shares have been slayed as earnings have been restated and restructuring is underway pundits are wondering whether the horror is properly priced in. GE, in the days of CEO Jack Welch was a killer. A $500bn wrecking ball which claimed it had to be a Top 3 in everything it did or it wasn’t worth it. GE is now worth $122bn, the stock halving since the start of 2017. Goodwill on the balance sheet has exploded from $68bn to $83bn while shareholders equity has slid from $76bn to $64bn. So subtracting the Goodwill from shareholders equity gives us minus $18.7bn.

Goodwill refers to the amount paid, when acquiring a company, that is in excess of fair value of the firm’s net assets. Let’s say the fair value of Company A’s net assets are $8bn, and Company B purchases Company A for an amount which corresponds to $11bn. After the transaction, Company B will be left with $3bn worth of Goodwill on its balance sheet. The intangible value expressed by goodwill is what Company B believes will exist in the combined company down the line in things such as brand name. However Goodwill has the potential to inflate the perceived level of Shareholder’s Equity in a company. Let’s say Company B has $20B worth of assets, $19B worth of liabilities, and $1B worth of shareholder’s equity. As this $3bn goodwill amount is a non-cash asset, and furthermore unlikely to ever be converted into anything of value to the corporation, then the argument could be made that Company B actually has negative $2B worth of equity. In GE’s case, it has almost $19bn in negative equity.

Interesting to note that Parker Hannifin was also in negative equity at its FY2017 close. When looking at many Japanese industrials like Komatsu or Amada they are comfortably in positive equity. So when the stock market eventually lunches itself, the American industrials do not appear to have the same meat in the balance sheet as the Japanese. Which sort of tells us that GE, as much as investors seem to be wanting to catch that falling knife, may be well advised to wait much longer. The word “too big to fail” somehow resonates much less these days.

As we wrote several weeks ago, the ratings agencies have made it clear that the average quality of US corporate debt has deteriorated severely over the last decade. Much of it was thanks to leveraging up at such chronically low interest rates.  One could argue it was rational however it seems it became addictive, driving merciless M&A deals which loaded all this goodwill on the balance sheet in the quest to drive ROE. The corporate bond spreads between AA and BBB- is currently a paltry 75bps (0.75%). Please refer to page 21.

With the US Fed curtailing its balance sheet and $9 trillion of short term national debt funding needing recycling in the near term, that corporate bond interest rate differential is unlikely to stay so tight. This could turn pear shaped very quickly.

Gun makers or Drug makers? Who should we be more afraid of?


One by one, more of Corporate America is shunning the National Rifle Association (NRA). There is a touch of irony, perhaps hypocrisy about these moves. For a long time it has served rental car agencies, United Airlines and credit card companies to show their support for the NRA as its membership base was credibly large that it was ‘good for business.’ Despite dozens of massacres after the Columbine High School shooting in 1999 why did they not shun the NRA in the last 19 years? Why didn’t the 14 gun massacres under Obama where Democrats had a majority in the House and Senate cause them to ban guns or automatic rifles period? Now all of a sudden corporates have woken up from their wistful slumber to realize that supporting the NRA may no longer be appropriate “in moving with the times”, the very phrase which is used to silence debate. In the process these corporates pillory all members of an association that in the overwhelming majority of cases are law abiding citizens.

Let’s make it clear. CM is no fan of guns. CM is a fan of laws. A fan of democracy that lets people vote on issues such as this. Changing the constitution is in most countries a matter for the people to decide, not just the handful of politicians within the walls of law making. CM doesn’t need a gun. CM doesn’t want a gun. CM, like most reading this can’t understand why one would want to massacre innocent people with a gun. However we’ve stated clearly that banning guns won’t fix the problem in America. One could easily drive a car through a school campus and mow down dozens of kids during play time. Do we ban cars? The two students who carried out the Columbine massacre had handgrenades, pipe bombs and propane time bombs. While guns were the sole cause of the 15 deaths, these kids had intended to murder 100s in the commons area with the bombs (which were made from everyday off the shelf items).

Although when United Airlines starts taking the moral high ground with respect to the NRA after its own scandals of heavy handedly frog marching passengers off its aircraft it isn’t worth listening to. If these corporates could openly say that running NRA discounts was not worth it on economic grounds in terms of the administration in running such programs one could understand. If they made rational decisions that showed their business would fall of a cliff by supporting the NRA one could understand. It hasn’t happened in 20 years, so why now? If one chooses to fly United for whatever reason (convenience, price, family emergency) will they stop flying it in fear of association with the NRA might be bad for their image? Does the average American, where there are as many guns as people, think ill of the NRA? 32% of US households own guns. Are 32% of households unhinged lunatics? Granted the NRA does itself  little favors in the PR department after such tragedies.

As we’ve written in recent days, the growing incidence of broken homes and the surge in the dispensing of antidepressants to ‘tranquilize’ those who might be tempted into suicidal or homicidal tendencies is a worrying trend. Pharma companies are expected to mint $17bn in antidepressants by 2020.  Should we spurn Eli Lilly’s over-the-counter drugs because they are the evil corporates milking billions from Prozac?

To put it into perspective the total number of overdose deaths involving heroin from 2002 to 2015 jumped 6.2-fold in the US. Automobiles killed around 32,000 people last year or a little over 2x that of heroin overdoses. When adding non-methadone opioids (illicit fentanyl) overdose that number surged to 20,000, a 33% YoY jump on 2014 and 5.9x 2002. Why is it happening? The problem for many prescription painkiller users is that once their bottle ends, the addiction doesn’t stop meaning many switch to heroin to get the same ‘opioid’ hit.

Excessive use of pain relievers make up a large proportion of illicit drug use. Oxycodone is one of the more common type of opiate pain killer and it is highly addictive. In 2010, the US Food and Drug Administration (FDA) required the formulation of OxyContin be changed to make it harder to become addicted to. Talk about loading patients with too much ammunition.

As opioid overdoses rise, companies such as Adapt Pharma have seen sharp rises in the sales of products like Narcan (Naloxone) which basically revives victims from the dead. Narcan publicizes its price that is even insured meaning one can overdose and revive with a $10 co-payment.

94% of insured lives in the US have coverage for NARCAN® Nasal Spray*. According to IMS Health, nearly three quarters (74%) of prescriptions for NARCAN® Nasal Spray have a co-pay of $10 or less**. For those paying cash, ADAPT Pharma has partnered with retail pharmacies to reduce out of pocket costs (Retail is $62.50/dose)…To expand community access, NARCAN® Nasal Spray is available to all qualified group purchasers for $37.50 per 4mg dose ($75 per carton of 2 doses). This pricing is available for all Qualified Group Purchasers, such as first responders (EMS, Fire Department, Police), community organizations and Departments of Health, regardless of size. This pricing represents a 40% discount off the Wholesale Acquisition Cost (WAC) of $125 per carton.”

Price hikes have been a feature of naloxene. As of January 2015, Amphastar’s version of naloxone was up to $41 a dose, according to Fierce Pharma, a pharmaceutical industry news website. That follows a price increase from $17 to $33 a dose back in October 2014, according to data provided by Truven Health Analytics. So not only is volume spiking, so is price. Walgreens has expanded the availability of prescription-free naloxone to 33 states.

West Virginia health officials are responding to opioid overdoses by distributing more than 8,000 kits with Naloxone that can get people breathing again if administered in time. Money for the kits comes from a $1 million federal grant to West Virginia, which has had the nation’s highest rate of overdose deaths at 41.5/100,000 people.

Local emergency medical services agencies in West Virginia administered 4,186 doses of Naloxone in 2016, up from 3,351 the year before and 2,165 two years ago and that data doesn’t include uses by hospital emergency departments, urgent care centers, first responders and family members.

The gun industry in America is around $11 billion. 35,000 work in the manufacture of guns and ammo. There are 50,000 retailers in the US. 32% of American households possess a firearm. One-third. The federal government collects $132 million in taxes on guns. 17 million background checks for gun purchases are conducted annually.

By all means let’s have common sense debates on regulation surrounding guns. Sending memes of Republicans on the payroll of the NRA can be met with as many Democrats accepting fortunes from the pharmaceutical lobby so as to prevent price cuts being driven through Congress. While guns maybe noisy killers, pharmaceutical companies are  in a sense becoming (or already become) stealthy silent assassins. Their drugs causing patients to switch to harder substances. 13% of adolescents are on antidepressants. Thirteen percent. 68% of them have taken antidepressants for 2 years and a quarter for over a decade,

The tragedy of school shootings is awful in every conceivable way. How it tears families apart, destroys the lives of survivors who must cope with unspeakable trauma and creates a platform for such horrid knee jerk responses in all forms of media. How the loss of 17 lives takes a back seat to agendas which feed the very opposite of the intention they proclaim. Corporates joining the bandwagon only fuel mixed messaging. It is exactly the type of ‘shaming’ that was so prevalent at the time of the election.

Trying to get the NRA to come around to spreading the word amongst its members that banning bump stocks and certain weapons is feasible won’t occur when corporates and the media publicly kick them. It is never an easy discussion but it only makes members want to dig their trenches deeper. Do people honestly believe that all NRA members would reject common sense proposals about screening, age limits and certain weapons restrictions? Yet that is the picture that is painted. They’re lunatics to a man, woman and child. Let’s hope that United Airlines and others that have spurned the NRA now turn to the drugs list in the company health provider to ensure that those pharmaceutical companies behind so many of the deaths from the explosive concoctions they sell are dealt with in the same way. Here’s a prediction. That hasn’t crossed their minds. So much for pharma companies saving lives. They are cashing in as a growing number of patients check out.

The day Elon Musk gets asked by…


Elon Musk said in the FY2017 conference call today: “Super Bullish…What I find sort of interesting is that our competitors – the car industry thinks they’re really good at manufacturing. And actually they are quite good at manufacturing, but they just don’t realize just how much potential there is for improvement. It’s way more than they think…I went through this math I think on a prior earnings call, but like it sounds like some of the fastest car factories produce a car maybe every 25 seconds. That sounds fast. But if you think of a 5-meter long car, including gap, and a 4.5 meter car with a half meter gap or something, that’s only 0.2 meters per second. Like grandma with a walker can exceed the speed of the fastest production line we’re in, so really no that fast. Walking speed is one meter per second, so five times faster than the fastest production line on earth.”

Listening to commentary like this just shows how cavalier the processes at Tesla are. The day Tesla gets called in by other kings of industry for lessons on production techniques the comment will hold water.

Toyota, which has coined almost every manufacturing effficiency jargon over 50 years, was invited by Porsche to fix its problems in the 90s. Several years ago Toyota was called in to help Lockheed Martin streamline production of the F-35 Joint Strike Fighter because of the massive cost overruns. The day Boeing calls up Elon Musk for tips on how to belt out more 787s two slices of humble pie will be consumed immediately.

Seriously one has to question how this board can believe it has the potential to be worth more than all the other volume and luxury auto majors combined when they make such fictitious claims. Sounds like Sakamoto from Elpida promising endless dreams. Elpida went belly up because it failed to deliver. .

Even your steak is at stake with the left


In order to create change in our society, we must challenge current belief systems and force people to take a side; oppression or justice, cruelty or compassion.” – Melbourne Cow Save Animal Liberation Army (MCSALA)

35 members of the  MCSALA forced their way into the Rare Steakhouse to protest last night. What is it with the left? Even diners can’t enjoy a meal without being harassed. Maybe customers were celebrating a birthday, anniversary or wanting to enjoy a steak after a hard day at work. Parting with good money to consume is a choice.

Instead of abusing customers why not whine to the government who clearly allow such supposedly inhumane slaughtering practices? Did they protest in front of the Indonesian Embassy when videos of Indonesian abattoirs showed how cruelly live cattle were being killed? Why not raid the Halal Certification Board? Ah no, that couldn’t be done because that would clash with the left’s other ideologies. It is not the principle but the side. Only soft targets with limited repercussions will do.

CM sincerely hopes charges are pressed against the MCSALA. Normally demonstrations in public spaces require permits. The Rare Steakhouse is a private space. It has a right to refuse entry to those that ruin the ambience. It rents the space to run a business and one can be sure the manager would not have invited them on the premises. It employs staff who equally shouldn’t face interference in the workplace.

CM wishes to see the restaurant get a lot of free publicity off the back of this stunt. That customers, through their own volition, exercise choice based on offering rather than be ranted to by protein starved vegans. Surely the ultimate irony would be to see the Rare Steakhouse see a large tick up in business.

People don’t have to take sides on every issue but the flaw in the MCSALA’s statement is that the left doesn’t believe in choice. It believes in shoving its views down the throats and those that don’t tow its line must be ‘outed’. No options but control. Indeed in its statement the MCSALA says it must “force”. Tells us all we need to know.

Imagine the howls if butchers and beef farmers walked into a vegan cafe and razed hell? Sadly they’re too busy making a living.