Shareholders

CalPERS unfunded pension deficit approaches $1 trillion. Who is counting?

calp.png

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).

 

Losing my Virgin-ity to the veteran community

va-logo-2018

Virgin Australia has copped a lot of flack over its unsolicited offer to prioritize veterans when boarding and to announce gratitude for their service. Sadly the plan has been savaged in the media as virtue signaling and riding the political wave of the PM to back discounts for those who served. Many veterans have come forward saying they have not asked to be saluted in this manner. Many of them wish to be thought of like you and I.

We can sit back and criticize the airline for not doing more due diligence with the veteran community, yet we should not overlook that CEO John Borghetti would have made this decision with absolute rock solid sincerity, thinking of the vets, not how he could win free publicity which is often the norm these days. Had preferential boarding treatment been given to an oppressed minority community he would have probably been championed as a hero of social justice. All of the media that smashed the airline – The Guardian, Fairfax et al would have praised the progressive action. Let us not forget that Virgin’s move was above all made with “good intentions.”

My first recollection of John Borghetti happened almost 20 years ago after some utterly dreadful Qantas service, where he happened to be working at the time. Despite receiving a relatively textbook letter of apology from the Chairman, John personally called me to “connect” with this disgruntled customer. No excuses were given. No attempts were made to cover up the pitiful customer service. He listened because he wanted to learn. He was authentic. No training manual could have taught John what he did. You cannot learn sincerity from a textbook. You either are or you aren’t. The veteran community should know that they will undoubtedly get the exact same ‘ear’ from the CEO to best address needs going forward and I encourage them to speak frankly to him.

As a civilian who is now working alongside veterans I’ve learnt more this year about how wrong many of my preformed notions were with respect to former service men and women. I’ve met veterans suffering from PTSD. I’ve met a war widows who lost veteran husbands to suicide. I spent a week at the Invictus Games seeing how these amazing warriors were ‘unconquered.’ I’ve met veterans, young and old, who are struggling to reintegrate into the workforce at an event. The issues are real. I have seen the amazing work done by veterans trying to find unique ways to help their former mates reintegrate into society. I suggest we embrace Virgin and refocus their positivity.

I am honoured to be given the opportunity to work alongside veterans to make this journey and learn every day. In a sense my mission is in part to represent the civilian community to make them understand veteran needs. There are so many positive ways to affect change and move away from the growing negativity thrown at events like Anzac Day as a celebration of warmongers where our media can be as brazen to criticize brave diggers as rapists, murderers and thieves.

Put simply, we civilians absolutely owe a debt of gratitude to those who have served. How we do it is open to debate. This is at its very roots of the Virgin move. To see the board cower to public pressure and look to rescind the offer on the basis of the constant negativity so prevalent today is the wrong move. Better still, Borghetti’s sincerity should be front and centre here. There is no market collapsing “damage control” risk for Virgin at stake. It is doubtful that veterans will desert the boarding gates of Virgin to punish it.

It would be nice to see that corporate governance today teaches that holding firm on the courage of their convictions is paramount. If the board learns that it must do more due diligence, then so be it. Learn and move on. Don’t wave the white flag. I sincerely hope that the Virgin board doesn’t flake. The board represents shareholders, not the mainstream media.

If I know John Borghetti from my own personal experience, Virgin Australia can achieve what it set out to do. Helping vets.  Does Virgin divert its planes to alternative airports when bad weather arises or do they ditch the aircraft into the sea?  The board should approach this episode with the same attitude.

It costs HOW MUCH?

VAbudget

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.

VAOIF.png

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.

VAOIFPatient.png

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

VAprosthetics.png

Spending on pharmaceutical products is up 1.9x since 2006.

VApharma.png

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.

IMG_0378.PNG

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

VAsubstanceabuse.png

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.

VAMH.png

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.

Why didn’t GE use the $45bn in buybacks to take care of the $31bn negative equity?

56EF2287-AD02-4349-BA83-0B9765777731

After GE’s monster $22bn goodwill impairment charge, the company remains in negative equity to the tune of $31.3bn. $79.2bn in goodwill remains on the balance sheet with $31.5bn in shareholders equity and $16.4bn in non-controlling interests. To think GE spent $45bn on buy backs over 2015 & 2016. Imagine if the company had used those funds to shore up the balance sheet and go back to positive equity?

While the kitchen sinking of GE Power should be deemed a positive (although somewhat expected) it is interesting to see the reaction to the shares (-9%) which flirted with April 2009 lows. Cutting the 1 cent dividend from 12 cents in the grand scheme of things was optics.

Although the goodwill charge is a non cash item on the balance sheet, she is clearly not in a position to deal with the rest of the goodwill just yet.

The brand new CEO has done the right thing to restructure the former largest company in the world but he has drawn attention to the most gangrenous wound that needs to be cauterized.

It is still a rough ride from here for an industrial stock at the top of the megacycle to have such a dreadful balance sheet.

232DC573-388B-42C8-9CBD-E9EC8265C423

 

 

Musk flips the ‘bird’ at the SEC

E1CA948E-BE24-4AD1-8F39-139CB3CD4BBB.jpeg

Tesla shareholders must wish Elon Musk would be as silent as his products. It seems the Tesla CEO has learnt nothing from his $20mn fine. Given that Tesla is still under investigation for other reporting  matters, it seems unprofessional to bait the SEC when shareholders want to see stability at the helm. Musk tweeted,

Just want to that the Shortseller Enrichment Commission is doing incredible work. And the name change is so on point!,”

Just further evidence this CEO has no wish to listen to his board or interact with them in a way that promotes best practice corporate governance. It’s still a one man band. The irony of the tweet is that the SEC’s leniency allowed him to stay at the top causing a 17% jump on the settlement.

Even worse Paragraph 13 of his settlement with the SEC requires him to seek board oversight of any public communications although has yet to be officially signed off by a judge.

In a twist or irony one shareholder tweeted back that he wasn’t just attacking the stock shorters  but the long only owners as well.

Tesla shares closed down 4.4% and indicated at $273 in the after market, a fitter 3% fall. At the start of the SEC decision last week the shares had traded as low as $267. In a sense Musk has been the Shortsellers Enrichment CEO not the SEC.

Flannery departs GE. Market rewards +14% in pre-market

232DC573-388B-42C8-9CBD-E9EC8265C423.jpeg

General Electric (GE) shares have been a dreadful investment. The company, which trades in negative equity is indicated c.14% higher in trade after CEO John Flannery stepped down inside one year on the job. Lawrence Culp replaces him as Chairman & CEO.

Losing Flannery will look to add about $14bn to GE’s value. Keeping Musk will look to add $7.1bn to Tesla’s value today. A tale of two CEOs. The power or losing one to that of keeping one.

Musk to recover $1.2bn based on pre-market

EEC104BF-487B-473D-943F-F2E345753322.jpeg

Musk stands to recover $1.25bn in wealth if the pre-market indications of Tesla prove correct. A $20mn fine from the SEC which effectively wiped $1.3bn of wealth will all but be restored. Is it just that investors think that nothing will change even if he isn’t chairman? Did the SEC fold to his star power or did they receive a free flame thrower to lighten the charge? While $20mn looked like a proper slap on the wrist he can shrug off the incident like it didn’t happen. All in all pretty impressive. He lives to fight another day.