Investment

$34,000 in school fees buys an activist indoctrination, not an education

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CM went to a private school in Sydney. In CM’s day, we were taught respect. To give up seats on the bus if adults got on. To open doors for others. To say thank you. You know, simple manners so devoid of the headphone-wearing, iPhone gazing secondary students today, completely oblivious to pregnant women or the elderly with walking sticks forced to stand on the bus or train.

To hear that Newington College and SCEGGS Darlinghurst are allowing kids to go on the school climate strike tomorrow is an utter farce. How is it that a school that charges up to $34,000 in fees, is prepared to allow kids (with parental permission) to strike? Where is the standard of one set of rules that all must adhere to? Where is the discipline?  At what point will such activism be acceptable to other pet grievances of brain-washed kids, undoubtedly at the behest of teachers pushing their own agendas? Why not teach kids that they can’t just get their way if they protest enough?

One can understand the school respecting and observing long-standing religious days for kids of certain faiths but all this action suggests is that there is a cabal of staff who are activists in the classroom espousing their own political agendas. The headmaster has apparently caved to a bunch of Yr 11 students because climate change must be a religion in and of itself. 

Newington’s own motto, ‘in fide scientam’ (in the faith of all knowledge), suggests the school now no longer adheres to its core values. To allow this simply says that teachers are getting away with brainwashing. Where is the balance? Wouldn’t the majority of parents hope the $34,000 to help provide their kids with a jump start instead of an idiots guide to civil disobedience? Why not dispense with the uniform or replace the blazer emblem with one from Extinction Rebellion?

So what of the stats? For national ATAR scores, Newington’s rank has slipped from 78th in 2013 to 99th in 2018. SCEGGS Darlinghurst has gone from 23rd to 25th over the same period.

Over recent years, Australia’s global education standards have been slipping – in science, maths and English. What a surprise when our academic institutions fold to trendy left-wing causes. Perhaps if they focused on “education” as opposed to “indoctrination” that the long-term prospects for these kids would rise appreciably.

Australia’s future looks grim – not so much for the planet but for the prospects of the coming generations who have been completely misled as to what is actually important and relevant out there in the real world.

Ford downgraded to junk

This week, Ford Motor Co’s credit rating was downgraded by Moody’s to junk. $84bn worth of debt now no longer investment grade. It will be the first of many Fortune 500s to fall foul to this reality. In 2008, there was around $800bn of BBB status credit. That number exceeds $3.186 trillion today.

CM has long argued that the credit cycle would be the undoing of the economy. For too long, corporates binged on easy money, caring little for credit ratings because the interest spreads between AAA and BBB were so negligible. The market ignored risk and companies went hell for leather issuing new debt to fu buybacks to artificially prop up weak earnings to give the illusion of growth.

Sadly this problem is likely to cause widespread sell offs by companies/investors which must stick to products (as woefully yielding as they may be) with an investment grade, exacerbating the problem of refinancing debt close to maturity. The thinking during easy credit times was simple – refinancing could be done with low interest rates because there was no alternative.

This is problematic for three reasons:

1) under the Obama era, much of the newly issued debt was short term meaning $8.4 trillion arrives for refinancing in the next 2.5 years, crowding out the corporate market.

2) more than 50% of US corporates are one notch above junk status. Refinancing will not be a simple affair.

3) more and more investment grade debt will be driven to zero or even negative yields as a result further exacerbating the problems for insurance companies and pension funds dealing with massive unfunded liabilities.

Last year, in relation to unfunded liabilities at US public pension funds, CM wrote,

California Public Employee Retirement System (CalPERS) lost around 2% of its funds in 2015/16. The fund assumed an aggressive 7.5% return. Dr. Joe Nation of Stanford Institute for Economic Policy Research thinks unfunded liabilities have surged to $150bn from $93bn in the last two years. He suggested the use of a more realistic 4% rate of return last year. At that rate, CalPERS had a market based unfunded liability of $412bn (or the equivalent of 2 years’ worth of California state revenue). At present Nation now thinks the number is just shy of $1 trillion using a 3.25% discount rate. He expects that the 2017 data for CalPERS will be out in a week or so which should give some interesting perspective as to how much deeper the pension hole is for Californian public servants.

N.B. California collects $232bn in state taxes annually in a $2.3 trillion economy (around the size of Italy).”

This is just California, which in the last 8 years has seen a 2.62-fold jump in the gap between liabilities and state total expenditures.

Unfunded liabilities per household. In California’s case, the 2017 figure is $122,121. In 2008 this figure was only $36,159. In 8 years the gap has ballooned 3.38x. Every single state in America with the exception of Arizona has seen a deterioration.

Switching to Illinois, we have a case study on what happens when pension funds go pear shaped.The Illinois Police Pension is rapidly approaching the point of being unable to service its pension members and a taxpayer bailout looks unlikely given the State of Illinois’ mulling bankruptcy.

Local Government Information Services (LGIS) writes, At the end of 2020, LGIS estimates that the Policemen’s Annuity and Benefit Fund of Chicago will have less than $150 million in assets to pay $928 million promised to 14,133 retirees the following yearFund assets will fall from $3.2 billion at the end of 2015 to $1.4 billion at the end of 2018, $751 million at the end of 2019, and $143 million at the end of 2020, according to LGIS…LGIS analyzed 12 years of the fund’s mandated financial filings with the Illinois Department of Insurance (DOI), which regulates public pension funds. It found that– without taxpayer subsidies and the ability to use active employee contributions to pay current retirees, a practice that is illegal in the private sector– the fund would have already run completely dry, in 2015…The Chicago police pension fund held $3.2 billion in assets in 2003. It shelled out $3.8 billion more in benefits to retired police officers than it generated in investment returns between 2003 and 2015…Over that span, the fund paid out $6.9 billion and earned $3.0 billion, paying an additional $134 million in fees to investment managers.”

Therefore Ford’s downgrade to junk will have the effect of repricing over a decade of misplaced central bank policy across all markets. The dominos are only beginning to fall. The market can absorb Ford’s downgrade but not if it has to deal with the panic of dozens like it.

CM has long been warning of GE. Despite being the world’s largest stock in 2000, it is 1/5 the size today, trades in negative equity, wasted $45bn on share buybacks in 2015/16 and were it be classified as junk would increase the pile of junk by 10% on its own. Broadcom and American Tower are other monsters ready to be hurled onto the ratings scrap heap.

Buy Gold. The US Fed will likely embark on QE. It requires an act of Congress to approve the purchase of equities but don’t be surprised if this becomes a reality when markets plunge.

This will be the reset of asset prices which has been long overdue thanks to almost two decades of manipulation by authorities. It has 1929 written all over it. Not 2008.

Qantas & Virgin answering questions nobody is asking

Qantas CEO Alan Joyce and Virgin CEO Paul Scurrah have told the National Press Club that part of the role of their businesses is to back social issues. Puhlease.

Have shareholders overwhelmingly voted in favour of Joyce deploying their funds to sponsor woke causes? No one is stopping Joyce from pushing whatever virtue signaling he likes in his own time, but he probably might reflect that most of his customers haven’t requested to be lectured on board. Scurrah is the newbie, so he seems to want to score some media attention.

The latest excuse to push this corporate social nonsense is the unfounded research that kids of today require their corporates to have these woke causes embedded in the culture for them to join. What happened to “employer of choice” based on the business model? Will budding pilots want to pick the airline with the best conditions and business survivability or that which has the best carbon offset programme? Truth be told, what young ecomentalist university graduate wants to join an evil carbon dioxide producing airline anyway?

Having said that, employee retention will not favour wokeness when pay and conditions remain crimped by misguided company policy vs more attractive opportunities at firms that focus less on this. Harvey Norman is exhibit A on that measure. It is crushing the competition.

Qantas only needs to look internally at its own carbon offset program and how dismal it is. While it might be the world’s largest, truth is around 2% elect to pay for the sin of flying.

Back in May 2018, CM noted, while waiting in the lounge,

“So to offset my flight to Haneda, CM would pay $11.21 AUD. CM can put it to ‘local action’ (fund activism?), ‘developing communities’ or ‘global renewables’. In its 2017 Annual Report, Qantas boasted,

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.

Perhaps more embarrassing is that The Guardian noted in Jan 2018 that,

Qantas [was the] worst airline operating across Pacific for CO2 emissions

Kind of a massive load of hot air when you do the maths!

Mr Joyce might earn $24m p.a. CM would reckon shareholders would be glad to hike that if he ditched the social justice nonsense.

Qantas service is rarely anything to rave about so more effort applied in that area could well serve the company’s (and shareholder’s) interests far better than answering question hardly anyone is asking.

Something kids will fear way more than climate change

Image result for teenagers smartphones selfies climate strike

Is there one thing greater than climate change that can cause children irreparable harm? Yes. Perhaps the kids attending the school climate strikes tomorrow ought to consider that the very smartphone devices that they can’t put down are also harmful to the environment. Will these kids happily give up their smartphones in a quest to save the planet? Will these kids be willing to give up Snapchat, Instagram, Facebook and Twitter to save their own lives? Not in a million years.

An abstract of a report on the impact of technological devices on GHG emissions by Belkhir & Elmeligi, titled, ‘Assessing ICT global emissions footprint: Trends to 2040 & recommendations is as follows,

In light of the concerted efforts to reduce global greenhouse gas emissions (GHGE) per the so-called Paris Agreement, the Information and Communication Industry (ICT) has received little attention as a significant contributor to GHGE and if anything is often highly praised for enabling efficiencies that help reduce other industry sectors footprint. In this paper, we aim at assessing the global carbon footprint of the overall ICT industry, including the contribution from the main consumer devices, the data centers and communication networks, and compare it with the to the total worldwide GHGE. We conduct a detailed and rigorous analysis of the ICT global carbon footprint, including both the production and the operational energy of ICT devices, as well as the operational energy for the supporting ICT infrastructure. We then compare this contribution to the global 2016-level GHGE. We have found that, if unchecked, ICT GHGE relative contribution could grow from roughly 1–1.6% in 2007 to exceed 14% of the 2016-level worldwide GHGE by 2040, accounting for more than half of the current relative contribution of the whole transportation sector. Our study also highlights the contribution of smartphones and shows that by 2020, the footprint of smartphones alone would surpass the individual contribution of desktops, laptops and displays. Finally, we offer some actionable recommendations on how to mitigate and curb the ICT explosive GHGE footprint, through a combination of renewable energy use, tax policies, managerial actions and alternative business models.”

The study found that the relative emissions share of smartphones is expected to grow to 11% by 2020, exceeding the individual contributions of PCs, laptops and computer displays.

In absolute values, emissions caused by smartphones will jump from 17Mt to 125Mt of CO2 equivalent per year (Mt-CO2e/yr) in that time span or +730%. Most of this occurs at the production stage. Nevertheless with mobile carriers encouraging shorter cycles to upgrade this will only get worse.

ICT will grow from 215Mt-CO2e/yr in 2007 to 764 MtCO2-e/yr by 2020, with data centres (storing all those photos) accounting for about two-thirds of the total contribution.

For comparison purposes, the entire carbon footprint of Australia was about 550 MtCO2-e in 2018.

CM guesses these kids ought to be walking to school too. It is a great lesson in what real sacrifice means. At least they got the day off school.

What are banned but addicted vapers going to smoke now?

Image result for smoking many cigarettes

Tobacco companies fall foul of most ESG (environment/social/governance)/CSR (corporate social responsibility) measures. Good. Give that so much money is already loaded into corporations that focus on financial virtue signalling, tobacco companies remain forgotten. They look a great mean reversion trade.

British American Tobacco (BTI) is trading at $36 almost half the level of two years ago. Now at 1.02x book value and a 7.3% yield.

Philip Morris Int’l (PM) is at $72.60, down from $122.90 in 2017. A 6.4% dividend yield.

Imperial Brands (IMBBY) at $26.73 down from $55.55 in 2016. A 9.2% yield.

JT is less than half its 2016 number trading at $21.44. A 6.45% yield.

Philip Morris doesn’t have a vaping business but it appears with all these bans in NY etc that nicotine-addicted vapers will switch back to the old school.

Old habits die hard and cigarette smoking is pretty inelastic. Even in bonkers $40 a packet Australia, the ABS records men continued to be more likely than women to smoke daily (16.5% compared to 11.1%). Rates for both men and women have declined since 1995 when 27.3% of men and 20.3% of women smoked daily. However, these rates have remained similar since 2014-15 (16.9% for men and 12.1% for women). Therefore taxes haven’t killed off the habit.

So start underweighting the rubbish in your portfolio that has a penchant for banning plastic straws in the staff canteen to those corporates that allow yourself the opportunity to kill you!

Let’s not forget that governments aren’t going to terminate the monster taxes from this either, especially that so many national and state budgets around the world are looking seriously sick.

WeWorked

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WeWork has delayed the IPO. According to Zerohedge, the initial appraisal value of $47 billion appears to be entering the realm of $10 billion. This has ‘canary in the coalmine‘ written all over it. The kaleidoscope of razzle-dazzle in the free money world looks to have stopped spinning.

The company looks toxic. Most people point fingers at the co-founder Adam Neumann,  who, according to WSJ,  reportedly sold $700 million in a mixed debt and equity transaction. CM may be a contrarian, but even he sees the pre-IPO sale as somewhat suspicious. Selling part of your stock as part of an IPO is one thing. Doing it prior doesn’t pass the pub test.

How can IWG plc (better known as Regus) make profits (albeit sideways) with the same concept? 2018 IWG revenue and profit after tax increased 51% over 2014 levels. Revenue increased 13.5% since 2016, but post-tax profit slumped 24%.

WeWork seems like the Tesla of the office space world. Huge promises but the numbers are struggling to stack up. Maybe WeWPresumably, due to a combination of intensifying shared office competition, start-ups spoilt for choice or simply failing to grow.ork should leap into insurance as a way to generate cash flow like Tesla has started to do?

Event manager compliance declarations?

One has to wonder about how strict corporates are in ensuring event staff declare perks of the job for compliance. We all know it happens. How is it the travel manager inside companies always has the best tan and looks the healthiest? She is only exploring potential offsite venues naturally. All part of the job…

At least the Raddison is being open about bribing potential event managers with kickback shopping vouchers if they spend even more shareholder funds than necessary.