Waste

GEzus Priced super far?

US Corp prof.pngIt is not rocket science. Generally higher interest rates lead to lower profitability. The chart above shows that quarterly pre-tax US profitability is struggling. We took the liberty of comparing the 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.

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With the Fed moving toward a tightening cycle, we note that the spreads of Baa 10yrs to the FFR has yet to climb out of its hole. During GFC it peaked at 8.82%. It is now around 3%.

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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.

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Corporate America binged on cheap credit over the last decade and given the spreads to Aaa ranked corporate bonds were relatively small, it was a no brainer. In 2015, GE’s then-CEO Jeff Immelt said he was willing to add as much as $20 billion of additional debt to grow, even if it meant lower bond grades. We can see that the spread today is a measly 0.77%. Way off the 3.38% differential at the time of GFC. Still nearly 50% of corporate debt is rated at the nasty end.

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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 its balance sheet. So as an investor, would you prefer the safety of government debt or take a punt on paper next to junk heading into a tightening cycle?

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In any event, the 4.64% 10yr Baa corporate bond effective yield is half what it was at the time of GFC. Yet, what will profitability look like when the relative attractiveness of US Treasuries competes with a deteriorating corporate sector in terms of profitability or balance sheet?

Take GE as an example. Apart from all of the horror news of potential dividend cuts, bargain basement divestments and a CEO giving vague timelines on a turnaround in its energy business things do not bode well. Furthermore many overlook the fact that GE has $18.7bn of negative equity. Selling that dog of an insurance business will need to go for pennies in the dollar. There is no premium likely. GE had a AAA rating but lost it in March 2009. Even at AA- the risk is likely to the downside.

Take GE’s interest cover. This supposed financial juggernaut which was at the time of GFC the world’s largest market cap company now trades with a -0.17x interest coverage ratio. In FY2013 it was 13.8x. The ratio of debt to earnings, has surged from 1.5 in 2013 to 3.7 today. It has $42bn in debt due in 2020 for refinancing.

By 2020, what will the interest rate differentials be? There seems to be some blind faith in GE’s new CEO John Flannery’s ability to turn around the company. Yet he is staring at the peak of the aerospace cycle where any slowdown could hurt the spares business not to mention the high fixed cost nature of new engines under development. In a weird way, GE is suffering these terrible ratios at the top of the cycle rather than the bottom. Asset fire sales to patch that gaping hole in the balance sheet. Looks like a $4 stock not a $14 one.

Folly of The Economissed

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On a flight back to Tokyo this week a copy of The Economist was in the magazine rack. A subscription had long been cancelled for its plunge into yet another group think rag. A long time ago, the magazine was regarded as the go to for objective journalism from economics, geopolitics through to specials. Now it is little more than a cheerleader. A chance was given to see if things had changed. If anything it has gotten worse. This article on the peace deal only reinforces the pathetic bias and wish that Trump losing is preferable to any alternative including world peace.

For no sooner had Trump sent a letter calling the peace talks with North Korea off, The Economist was writing about humiliation. They’ve got to be kidding?

While even the blind can see any postponement is a setback, it is not without reason. Trump has made absolutely clear from the beginning – ‘peace or business as usual. Your move Kim.’ 

This started when Kim Jong-Un fired angry remarks when long scheduled war games were  commenced by the South. If one wanted to gift the upper hand to the North Koreans in the negotiations then stopping annual war games would be a great way to do it. It was tactical.

Glass jaw or not, firing salvos at Vice President Pence or standing up US envoys is not conduct becoming peace talks. Trump’s letter sounded somewhat childish with respect to comparing arsenals again but the point being made to Kim is clear – “we’re not playing. Put up or shut up!

This is exactly what you’d want Trump to do. Not some Obama era red line which crossed carries no consequences. This is exactly why there is so much geopolitical instability thanks to 8 years of utter weakness in foreign policy. This isn’t about humiliation at all. This about a world leader who is using clear military and economic strengths at the negotiating table with a dictator who 6 months ago threatened to nuke Guam. We should not want Trump to appease at any cost which we’ve seen throughout history carry devastation.

The reason Kim was drawn to the negotiating table was because China realized the new sheriff wasn’t bluffing. Why was Beijing Kim’s first state visit before shaking hands on the 38th parallel with President Moon?? He was seeking assurances from the other dictator on staying in power lest booking a plot of land in exile in Sichuan province if things require him to step down.

Kim needs to realize that the ‘throwing toys out of the cot strategy’ of decades past no longer works. He was hoping to get an apology from Trump along with better concessions ahead of the negotiations. Trump essentially told him the ‘art of the deal’ in that the status quo remains if he doesn’t wake up to harsh realities. Sending home three American hostages was a token.

It will be China sending Kim back to the meeting table with Trump because it will ultimately be managing the protectorate after any peace is signed for its own geopolitical aims. China does NOT want US friendly forces on its border. Best keep the buffer by getting Kim to accept a lesser deal where he gets to keep his life. For a man in his early 30s he can either choose to go down fighting or see out his days with the embezzled billions and bevy of beauties in his concubine.

To take The Economist at its journalistic integrity, it will be secretly happy if North Korea doesn’t sue for peace because any victory for Trump is something it can’t swallow. For the magazine to have that level of disingenuous editorial speaks volumes about turning a once prestigious brand into a tabloid. Reading through the blurb of The Economist’s 2017 Annual Report and the trends tell the story.

Tesla Elongates Fight against ‘unfair’ media

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CM totally sympathizes with clickbait media cycle. Tesla CEO Elon Musk railed at the negative coverage surrounding the company in recent times. The memories are clearly short. The media is generally effusive with praise of Tesla. How most newspapers and magazines fawn over Musk! Dan Primack made this point well:

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Edmunds has also written a damning review of the Model 3 announcing how many problems the car has faced since it was bought.

Some things from the Edmunds long term test were as follows:

The most annoying of those issues was a repeated, uncontrollable increase in stereo volume, sometimes when we weren’t even in the car. Basically, the stereo would suddenly go to full volume without explanation. This and other issues are cataloged from our notes below:

• Would not recognize keycard in or on the console and hence would not go into gear. It did, however, unlock the car. Workaround was to force quit the app and restart the app. Then it would allow the choice of Drive or Reverse.

• The backup camera screen did not appear when reversing.

• Nav screen going haywire: zooming, scrolling, pinching, pixelating all at once.

• Audio system turning on by itself at full volume.

• Audio display randomly moving up and down the screen without any command from a human.

• Audio system came on and went to full volume all by itself while the car was off, locked and unoccupied. I heard it from 100 yards away. “Who is that joker playing his stereo so loud I can hear it from here?” Oh, it’s Elon. I turned it down, but it kept wavering up and down as I started driving, working against my repeated attempts to dial it down. Then it blasted all the way to maximum. My ears are still ringing two hours later. Fixed after reboot. Not sure about hearing damage.

• Audio page leaping up and down rapidly like the up-caret button to expand the source menu was being played with by a kid who ate too much candy. Concurrent with the volume problem above. Same reboot.

• Icons on the map screen flickering.

• The passenger vanity mirror fell off completely. Installed and held on only by double-sided tape. Reinstalled by pressing really hard on the mirror.

• The screen went completely dark on startup, no music or operation. Restarted the car. The screen worked; the backup camera did not.

• The car will not shift into Drive or Reverse upon startup. “Vehicle Systems Are Powering Up. Shift Into D or R After Message Clears.” Have to wait for it to power up. A loud click comes from the rear of the car as if a drive shaft is engaging and the message on the screen goes away.

• The car displays a new message: “Cannot Maintain Vehicle Power. Car May Stop Driving or Shut Down.” No shutdowns yet, but keeping an eye out.

• With 170 miles of range, the car displays a “Regenerative Braking Limited” message. Plenty of available space to store regen power. Logged the issue, then reset the screen with a reboot. The message has not displayed since.

• While the car was parked, the passenger sun visor was left down and the mirror fell out. Pressed back into place. Hoping it won’t fall out again.

While no one should expect reliability to be at levels of mainstream manufacturers that have been at it for decades longer, quality remains a big issue for Tesla. For Musk to slam the media will only lead to responses as this.

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Bosch Japan celebrates diversity in the kitchen

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“In order to create a diverse environment, we first begin to understand!”

Hello! from the Bosch, Public Relations team!
From this week, the Bosch Japan group begins with the diversity of the country’s food in the dining room at each office factory.

This is a part of the initiative of ” Diver City Day which is widely expanded around the global Bosch group.

The aim of the initiative is to have a new approach and its own ideas, and to be able to respond to a variety of customer needs, and eventually the company’s success will lead to the success of the company.

We want to build a variety of HR initiatives in order to create more diverse environments in the future!

What is this obsession with corporates feeling compelled to ram “diversity” down staff throats? Why not just serve foreign cuisine and let staff enjoy it? They’ll notice it. Stick a Thai flag in the meal if need be to denote where it is from.  Why not let them provide feedback of their own volition? Will the workers all of a sudden feel after eating Egyptian cuisine that their customers at Mazda are in need of Arabic on their diesel pumps? Why not secretly record lunchtime conversations to ensure staff are “on message” otherwise force them to do hours on end of appropriate workplace behavior classes? Did the diversity brigade in the kitchen consider that Jews or Muslim staff (if any in Japan) can’t eat pork? Lest they be offended.

Bosch is an auto parts manufacturer which in Japan would serve predominantly Japanese customers. Will diversity rally the troops to higher levels of excellence? Completely immeasurable. Will Bosch customers select them on the cost performance of their products or pay premiums because the staff canteen serves chicken satay and tacos?

Indeed if Bosch HR & PR think they have a diversity problem that requires remedying through the kitchen then perhaps we should question their substandard hiring practices that allowed such bigots on the factory floor in the first place. Seriously, if they feel that staff are so out of touch that they require re-education, why not waste more money on internal indoctrination. Bosch be warned – virtue signaling can backfire.

Look how well things have gone for Starbucks preaching their virtuous side. Now staff are concerned their seating areas/bathrooms (now open to all after bending to social pressure based on something they were well within their rights to do) will be open to homeless people or drug addicts looking for a place to shoot up. So in order to appeal that the coffee chain is of higher moral standing they’ll happily trade alienating paying customers to achieve it. Lunacy. By that measure every corporate office should open their amenities to anyone. How shameful they put their businesses before humanity.

Maybe Bosch should look to hire based on diversity rather than quality of engineering talent. You can be sure that’s won’t lead to “success of the company”. Quite the opposite. Note Bosch is sponsoring these ads on social media. Pathetic. It is sort of like those people that profess their love and happiness endlessly on social media. So lacking in confidence are they in their partners that they feel safer telling the world instead of the one that matters.

How would you like to save the planet?

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Climate alarmists are an interesting mob. E&E Research cites that moving North Koreans toward basic necessities you and I take for granted (e.g. electricity) might necessitate coal fired power stations being erected. That would lead to a growth in emissions as the country is rich in coal reserves. This must be stopped immediately.

E&E’s Daniel Kish said, “North Koreans reduce carbon dioxide emissions by eating, rather than burning, twigs. That’s what central control always ends up doing,

So it would seem that keeping North Koreans in the dark and encouraging its dicactor to keep developing nukes and oppressing the population is preferable in order to stop global warming. Why not keep all developing nations from jumping on the grid? Why not sacrifice their people for the greater good of the world. How can E&E continue its work if sacrifices aren’t made elsewhere?!.

Saving the planet is a grand idea…but how? Is it any wonder climate skeptics keep questioning the science….?

A tick for Turnbull

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It is a rare occasion that CM praises the Turnbull government. However, the actions taken to say “NO” to a special UN investigation on Israel’s activities on March 14 are worthy of congratulation. Two reasons;

1) the UN Human Rights Council (HRC) is stacked with countries (Cuba, China, Saudi Arabia, UAE, Qatar) with woeful human rights records and have no place dicatating impartiality. When the HRC has looked to investigate Israel more times than the rest of the world combined one doesn’t have to question bias. In the last 3 years, Israel has been the subject of 83 of 97 UN General Assembly resolutions. 86%. The UNHRC has zero credibility – period.

2) Hamas openly came out and admitted that 50 of the 62 dead were its own terrorists. 84% accuracy of those carrying handgrandes and other weapons. Yet honestly, who brings their children to an area where there is risk (and plenty of warning) of live fire? It is pretty simple. If you don’t want to get shot then don’t put yourself in a zone where there is a high likelihood of such. If no one turned up on the border, the body count would have been zero. As written last week, Hamas is far happier with sacrificing lives than Israeli Defence Forces are taking them.  When Hamas websites call for killing Israelis for those that break through, can you honestly blame Israel? The Israelis are not out to make headlines any worse than they already are. They are defending their sovereign borders and the reality is any of us would expect our armed forces to do the same if they were under siege.

The UN has long outlived its usefulness. Robert Mugabe is considered an ambassador for WHO. How he could possibly pass a sniff test on any level is beyond most. Such is the bias within that the UN, in an attempt to strike back at Trump’s intended cuts, considered deploying Blue Helmets in Chicago to help stem gun violence. These people are unreal.

It was once said, “if the Palestinians chucked their weapons into the sea there would be peace. If the Israelis threw their weapons into the sea there would be genocide.”

Overthrow the Monarchy? What would the left do without it?

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Kenan Malik of The Observer wrote of the need to ditch the monarchy. His view was that adding skin colour to the mix won’t change the overall desire to throw it in the dustbin of history. He said,

Nor can I work out why adding a few more black dukes and duchesses, or even kings and queens, should be a step forward. Equality does not mean making inherited privilege more “diverse”. It requires us to get rid of the whole shebang. Adding a splash of colour to a feudal relic is not my idea of social progress.

So typical is the envy of the left that they want to strip everything from the Royal Family and make them all commoners. Why not turn Buckingham Palace into a soup kitchen and boarding house? Put Queen Elizabeth into a waiting list for public housing. Ignore that Prince Harry and others in the Royal family have served their country in the armed forces. Harry put his life on the line in defence of his country. It is a wonder whether Malik has served his country with as much distinction. What fine men the princes have become despite the tragic loss of their mother.

However we should examine the hypocrisy of the left to overthrow the monarchy. BBC, the socialist biased state broadcaster rejected its charter and couldn’t help itself throw President Trump under the bus in terms of comparing crowd numbers at the Inauguration versus Harry & Meghan’s wedding. Three things;

1) were it not for the overwhelming popularity (18mn watched it in the UK alone and 100s millions worldwide) of the Royals then the BBC couldn’t have an opportunity to bash the President in this way;

2) for the Queen to accept a divorcee into the household to marry her grandson shows how ‘progressive’ Her Majesty is. Good luck getting the Japanese Imperial Household Agency accepting something like this. The left should praise her open mind not censure her for being an out of touch bigoted granny and;

3) the wedding was all about diversity which the left loves so much. The 14 minute self-indulgent hijack (sorry, sermon) from a black bishop to a black cellist to a black choir. The music was indeed delightful. Harry even drove away in a ‘save the environment’ electric Jaguar E-type although one could argue that an original petrol version might not have started.

Malik should study the 2015 survey by Yougov which found 68% of the British public believe the monarchy to be good for the country and 71% think it should remain in place. The total annual cost of the monarchy to the taxpayer is £292m. Brand Finance Research believes the monarchy tips in around £1.8bn per annum to the UK economy. That is to say they more than pull their weight.

He shouldn’t envy the Royals but pity them. Think of what the Queen has sacrificed in the 66 years she has ruled. Sure the accommodations at Buckingham and Windsor Castles are comfortable, not to mention the numerous butlers and servants who make life easier but think of what she has had to give up in terms of privacy to serve her country. Think of the paparazzi who hounded Diana to her death over 20 years ago. The Duke & Duchess of Sussex will be increasingly scrutinized by the media. The mainstream media would die without the monarchy.

Yet Malik drones on about his real hidden agenda suggesting, “As for the belief that Meghan will break down barriers for black people and make minorities more accepted as truly British, that’s as anachronistic as the monarchy. Faced by an abusive skinhead or by a police officer about to stop and search me, my first thought has never been: “If only there was a black Windsor, then I might be accepted more.”

How in the name of all that is holy that he can talk of how poorly minorities are treated by the British police in 2018? Perhaps he should look at the shameful cover-ups over ‘Asian rape gangs’ by the police over decades to show how the complete opposite is true. Or answer why two ‘white’ fathers were arrested by the police for trying to rescue their underage daughters from rape dens? They were charged with illegal entry and disturbing the peace. Or the arrest and deportation of EU citizen Martin Sellner and his girlfriend Brittany Pettibone looking to make a speech at Speaker’s Corner and conduct an interview?

Society may be far from perfect but to run these identity narratives using the monarchy as a beacon of bigotry serves no purpose when the facts are examined. Perhaps he should take up his victimhood with London’s first Muslim mayor Sadiq Khan because voters are so against minorities. No, it’s just easier to imply that white Brits are xenophobes and the monarchy embodies that same white privilege. Until we guillotine the Royals, the sharp remedy that will cure this lack of diversity awaits.