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Austria proves again why the EU needs to listen more and talk less

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God gave us two ears and one mouth so that we’d listen more and talk less,’ so the old saying goes This is what the EU gets for trying to bully its member states. It wasn’t long ago that EU President Jean-Claude Juncker was telling Austrians that if they democratically elected Norbert Hofer of the right wing FPO then the EU would remove Austria’s voting rights and cut off any transfers. Well the Austrians have voted for a conservative anti-immigrant party (which wants a programme to get immigrants to assimilate with the local culture) with a 31yo leader, Sebastian Kurz. His People’s Party garnered 31.4% (+7%) of the vote with the far-right wing FPO coming in second at 27.4% and incumbent Social Democrat Party coming in third with 26.7%. The Greens will probably not make the cut off of 4% to make a party, So once again the EU has had yet another major repudiation of its totalitarian ideals.

CM has been making the point for ages that forcing one’s beliefs onto others must be done in a way that listens to the other side. Otherwise it delivers results like Trump. It seems the EU hasn’t learned a thing.

So what have we had?

-Le Pen garnered 1/3rd of the French vote (double the best ever achieved by Front National),

-the far right Freedom Party’s (FPO) Norbert Hofer still managed 46% in Austria farcical re-run presidential election),

-Geert Wilders’ 25% increase in seats for the anti-immigrant PVV in The Netherlands,

-the surge in the Sweden Democrats to the top of the recent polls, Elections in 2018.

-Italy’s referendum which turned into a backdoor vote to oust PM Renzi. Elections in 2018 likely.

Brexit (although PM May is handling negotiations in true British efficiency – Fawlty Towers ring a bell?),

the Swiss handing back a 30yr standing free ticket to join the EU,

-the AfD in Germany getting 13% of the vote (Merkel may have won but it was her party’s worse showing in 7 decades)

…these don’t look like promising trends for an EU which is already badly listing. Despite ample warnings the EU refused (and still refuses) to change its course or exercise due care. It just issues more threats.

While the left openly voices its rage at these ‘right-wing’ parties growing in support, they never bother to seek reasons why. The right are generally just dismissed as racists, bigots or worse.  Major party loyalty has never been worse. The fabric of the loyal party voter base is wearing thinner. Take Australia’s One Nation Party led by Senator Pauline Hanson. The popularity of the mainstream LNP and Labor Parties is at record lows. One Nation is now 10% of the vote from 2% several decades ago. While some parties may claim their loyal base has abandoned them the stronger case to be made is the clear shift of the parties away from their once faithful constituents. Why?

Incumbent governments seem to cower at receiving negative news from the 24-7 polling cycle that is social media. Being careful to avoid inviting attack, they pander to all of the socially acceptable agendas – climate change, gender fluid bathrooms, laws clamping down on free speech, open borders and afffirmative action.

However political correctness is clearly not the answer as these results across Europe and elsewhere show. People are sick of the brow beating by socialist activists. Tired of the constant protests and social justice bleating. The NFL might find that most of its fans are against police brutality but they aren’t wanting a weekly lecture in grievance politics with the price of entry or their cable TV channel. Growing weary of the idea that it is ‘free speech’ and anything against those ideals are deemed ‘hate speech’. It is not to deny some positions are not necessarily palatable but in the marketplace of free speech, ridiculous positions can easily be disproven. Better to give extremist voices a chance to talk and invite public opinion on them at their own peril. Shutting it down forces it underground., making it inherently more dangerous.

Too many mainstream political parties are moving off the policy reserve that defined them so their once loyal followers are actively seek ones that will. While Hanson’s One Nation or Senator Cory Bernardi’s Australian Conservatives may not tick every box to existing LNP voters, they cover enough of the positions that matter to them that they’ll tolerate some of the more out there ideas. It is not uncommon to hear the left complain at One Nation’s is growing popularity at the expense of the Greens but it is a devil of their own making.

So will the EU listen to the Austrian call? Will it pay attention to the Hungarians who voted over 98% against accepting forced migrant quotas? Think through the logic. If you were an asylum seeker, would you think your chances of unincumbered settlement would be best placed where 98.4% of the population doesn’t want you? It is irrelevant whether we think the Hungarians are insensitive brutes not to extend a welcome to those that are legitimately in need. It is their country and their democracy has spoken. If Brussels assumes to dictate to Hungary how it wishes to protect its culture and whatever it holds precious, why shouldn’t the EU have the same rights to enforce income tax, housing benefits and anything else it sees fit? Of course it is a preposterous notion.

It will not be long before the EU will be front and center on Greece. Let us not forget that the EU colluded with Goldman Sachs to ‘fiddle’ the accounts to make Hellas much prettier optically than it was. Was this pig without lipstick it wouldn’t have gained acceptance to the club. So the EU is not in a position to claim innocence over a deliberate ploy to ram-road the Greeks into its federal state yet have no qualms treating it with disdain. Talk about double standards.

In all seriousness the treatment of the Greeks by the EU is despicable beyond words. So for all of the left’s blind love for the EU and its socialist agenda, 36% of Greeks live below the poverty line and 58% of the youth are unemployed. So for all of the EU’s shared sense of purpose and equality, that means many can’t access affordable healthcare because it is generally provided by corporates and when you lose a job you lose the healthcare. This means many are forced to use A&E of major hospitals which are now overcrowded and understaffed as more doctors are leaving to seek better fortune for their services elsewhere.

If that wasn’t enough, mothers who had given birth were being restricted from taking their new-borns home if they couldn’t pay the hospital fees. While the government has banned this practice they have introduced new laws to allow the seizure of assets (e.g. homes) if debts are not settled.

Shortly, the Greeks are coming up for discussion over its debt position and austerity. With just months left before Greece’s latest lifeline expires, officials directly involved in the country’s bailout say they don’t have the stomach for contingent aid program when the current one expires in August 2018. While the EU and Athens are battle worn after 7 years of this knife edge rescue,  Greece will need to show it can go it alone but it’s eurozone creditors will be reluctant without further strings attached.

Here is betting that the EU doesn’t heed the lessons that have been ringing loud and clear for years. Sincerely hoping Greece leaves the EU and lets market forces revive its economy. Better to die on its feet than live on its knees.

Alitalia – what is it with airlines and government support?

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Last Friday Italy extended a bridge loan for Alitalia, which is in special administration as plans for it are determined by the state.  Italy’s cabinet has  passed an emergency decree to add a further 300 million euros on top of the 600 million euros it made to the ailing airline in May. It has extended the deadline for the repayment of the loan from November 2017 to Sept. 30, 2018.

Airlines are perhaps one of the worst industries as an investment one can find. High fixed costs, variable fuel prices, volatile economic cycles and intense competition. Yet with all of this, governments see them as national icons. Losing the flag carrier is viewed by some governments as a sign of economic impotence.

Several years ago, Japan Airlines went through a state-funded rehabilitation where the airline was able to overhaul its fleet while its legitimately profitable and unassisted competitor All Nippon Airways (ANA) got nothing. In the reverse poor old ANA was effectively taxed as its biggest rival got free kick after free kick from the government.

Qantas reported a $235 million loss in the last half of 2013 and cut 5000 employees to save the company $2 billion. The government was pressured to give state aid to prop up the airline but then PM Tony Abbott said, “because we do not want to be in the business of subsidising any single enterprise. It’s not sustainable in the long term”. So Qantas didn’t get help in 2014 and the airline has since rebounded and recently compensated its CEO Alan Joyce over $24mn as the shares have stormed 6x since the lows of 3 years ago. Most of the 5,000 let go have been recovered.

Which begs the question of state subsidies. When looking at Australia once again the state spent billions over decades to defend a bloated, inefficient and uncompetitive car industry. Nissan, Mitsubishi Motors, Toyota, GM Holden and Ford all closed local auto making opps. When businesses are subsidized, the necessity to reform is numbed. There is less need to get fit and look for efficiencies to get off the taxpayers’ teat. So even after 20 years and $12 billion spent to protect 45,000 jobs, all makers packed up and went home. Would have been better to write each worker a $250,000 cheque.

Of course some will argue that protecting jobs is a noble quest. Nobody likes seeing people unemployed. However if the rest of the world can make the same products cheaper and more efficiently why should consumers and taxpayers be forced to prop up those who won’t make the effort to reform.

Alitalia is yet another one of these businesses that is in the citizen’s pockets. If KLM and Air France can pair, Lufthansa and Swissair can join why shouldn’t Etihad back the initial investment it made in Italy’s national carrier. Another Loan is Time-warped, All Logic Is Abandoned.

Kobe Steel’s White Samurai – who might be forced into national service?

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While we are some way off understanding the extent of damage to Kobe Steel, we shouldn’t rule out the inevitable action which could involve a structured rescue of it, a white samurai if you will. Japan’s largest steel company NSSMC (5401) owns 2.95% of the outstanding shares of Kobe Steel. Will we see a motion in several months time as more facts become known for a consortium like the INCJ to team up with NSSMC to turn it into another Hinomaru sunset business? We saw the dying semiconductor industry in Japan get rolled into Elpida (which went bust) and cell phone screen players get merged into Japan Display (still listed) so why would anyone doubt a Hinomaru Steel consortium which would be a forced sense of national duty. While still way too early to surmise we should not ignore such a scenario should Kobe really find itself hoisted by its own petard. Corporate harakiri is the last thing Nippon Sumitomo Steel holders want from a governance perspective

Kobe Steel 5yr CDS not showing much fear vs history

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Kobe Steel’s 5yr CDS rate showing a 271bps premium above the risk free rate from around 50bps before the scandal broke. During GFC it was around 600bps+.

Kobe Steel scandal may make Takata look like a picnic by comparison

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Actually this could be so much worse than the Takata scandal. Kobe Steel’s data falsification on its products – especially to Subaru Corp – could raise the risk of insolvency of the former. Subaru is responsible for the MOST crucial part of the Boeing 787 – the centre wing box (CWB). While Boeing has assured us that there is no imminent safety risk, the question is one of determining the fatigue of the substandard materials supplied to Subaru by Kobe are part of the CWB. What many fail to realize is that commercial aircraft approval by the regulators makes getting drugs approved by the FDA as easy as shelling peanuts. Every time a plane is in the air it has to be as near as makes no difference 100% safe. Drugs that give you a side effect of drowsiness is not a big deal to the FDA. In fact for aircraft it gives “do not operate heavy machinery” a whole new meaning.

The CWB effectively is the piece that connects the wings to the body. It is without doubt the most important structural piece on the plane. Worse, it is perhaps the most difficult part to replace in terms of man hours. Effectively the plane would have to be broken apart and reassembled. The sheer logistics of this would also be mind boggling. The retrofit (if even feasible) would be a $20-30mn per job including the parts, labour and time out of service (compensation to airlines) and recertification. That’s per aircraft. So that would cost around $10-15bn.

The question then becomes of the 500 odd 787s in service what the FAA decides to do. Perhaps the planes’ useful 25 year life are reduced to 15 years. That would smack residual values and airlines would demand compensation for the gap and the potential for lost revenues. So were 500 aircraft to lose 40% of the serviceable life at $150mn a copy that is $75bn.

While this is worst case scenario analysis for Kobe Steel which would be liable for the lot, we are staring at the risk of a wipe out. Kobe Steel has $1.8bn in cash. Somehow it’s $8bn market cap may fall much further.

Hardly any of this is priced because the FAA doesn’t take things lightly until it has all the facts.

This article is not intended to be sensational rather highlight the potential for a huge weight from the US (not Japanese) regulator to push for a safety recall of epic proportions. We won’t know yet but buyer on dips beware.

Up 100% in one week – where is the speeding ticket?

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While Howa Machinery (6203), Japan’s largest small firearms manufacturer, has had its index weight lifted within Topix on Oct 5, the shares have jumped another 100% since reporting on it last week. Will the JPX issue a speeding ticket to investigate a 100% rise in a stock that has already risen 100% in the last 12 months on zero positive news flow? The answer is no. While ETF inclusion and index buying of an illiquid stock can explain away some of the rise, the fundamentals don’t match the performance. Up another 10% today.

Kobe ‘Steal’ – will the market referee wave a red card at what looks a lot like insider trading?

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If the referee caught Kobe Steel’s (5406) rugby team up to such foul play it is likely that players would be red carded. While unconfirmed speculation at the moment, it would appear that since September 21st Kobe Steel shares came under heavy selling pressure in what a seasoned market punter might suspect looks like insider trading via aggressive short selling. 7 straight negative candle sticks. Kobe Steel spilled the ball on its data manipulation on October 8th.

This would not be the first time that a broker conspired with a fund to short sell a stock ahead of a negative release on insider information where several weeks later news broke and sent the shares collapsing. This is the current action of Kobe Steel shares.

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So excluding borrowing costs or any leverage, if one had managed to short sell Kobe Steel at 1350 (on Sep 21) and brought back at today’s prices a quick fire 53% return would be gained.

The important question is whether the regulator will investigate any potential foul play when looking at the video replay. I will be asking this question directly to the Financial Services Agency (FSA) as I have been invited the regulator to give a speech on ways to improve Japanese corporate governance in a few weeks time.

This won’t be just a beat up of Japan’s corporate governance as foreign corporates have made countless scandals post the introduction of Sarbanes Oxley in 2002.  However it will aim to be a realistic overview of tolerating what seems to be endless preventable insider trading scams with paltry penalties of $500 and a slap on the wrists with a feather duster.

Until serious punishments for flagrant market manipulation are thrust front and centre in front of bewildered and annoyed (foreign) investors, the cynicism will remain that Japan is not a safe place to invest. Remember insider trading is effectively fraud. Perhaps your pension fund owns Kobe Steel in a global portfolio meaning that some shady investor has stolen your retirement to feather his or her nest.

Perhaps I should thank Kobe Steel for getting dirty in the ruck area to help the final presentation draft.

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