The high frequency traders are just making it up

Whilst I am on the subject of rapid trading I can't let this go by (courtesy Josh).  Its picosecond trading: quoting efinancialnews.com...

Speaking at a London conference on Tuesday, Donal Byrne, chief executive of Corvil, a high-speed trading technology company, caused a ripple of audible incredulity throughout the room when he suggested that trading speeds could be reduced to picoseconds in the not too distant future.

Josh who (a) reviews everything and (b) has a decent eye for garbage – made the obvious point.  A nanosecond is a very short time.  Light travels about 30cm in a nanosecond – so if you want nanosecond trading your computers need to in the same box – and probably your chips need to be on top of each.  And even then it is problematic as the data for matching the trade will need to travel through the chips many times to be processed.

Light takes about 20 picoseconds to travel through a silicon chip.  Presumably it has to do that a few times to complete a trade.  So picosecond trading is an Einstein speed-of-light counterexample and Donal Byrne and his company are in line for a Nobel Prize.

Josh is more gentle than me – so I am gonna say it:  Donal Byrne is a technologist speaking garbage.

When the leaders in the field start speaking easily identifiable egregious crap you know the game is nearing the end.  And so it is for high frequency trading.  If there were any decent return on capital for technology to make trading faster that return is likely to be pretty thin.  (I would not invest in any fund that talks about that as its "edge".)

Of course we can all get smarter rather than faster.  Including it seems Mr Byrne...



John

Audacious stock promoters or gungslinger day-traders

Lucas Energy is a small cap company which appears to be honest but surrounds itself with shady characters.  The company buys shut-in and otherwise exhausted oil wells and rehabilitates them – a classic Ben Graham cigar puff play.  The wells may be cheap – and maybe you only get one puff before they finally give up the ghost – but because you picked the cigar butt off the ground the return on equity is adequate.

The company adds a little spice to the returns by cutting in various penny stock companies on wells.  (See for example Savoy Energy - now sub 1c - who uses Lucas Energy as an operator.)

The penny-operators pay good money for lousy (but producing) properties and the stock promoters thus announce their production numbers.  No mention of course that these are the last puffs on a cheap cigar – but hey at least these penny-stock promotes are real producers unlike some I have blogged about from time to time.

And besides you can't knock Lucas energy for selling overpriced cigar-butts.  After all Lucas Energy is in the business of trading in exhausted oil wells and if someone wants to buy a share in one why should Lucas stand in their way?  The motives of the buyers are not Lucas Energy's business.

What is however perplexing is the sudden trading in Lucas Energy shares.  Lucas is Amex listed and used to trade 100 to 300 thousand two dollar shares a night.  This was generous turnover for 16.6 million shares outstanding and a fair whack of those locked up in the hands of management.  I never quite understand why the float of the company needs to turn over ever 50-70 days however this turnover is high – but not unusually so.

Suddenly the market view of Lucas changed.  The precursor was a press release stating that a well in the Eagle Ford trend was finished and they expected it to flow at 500 barrels of oil per day.  This is a fractured well and like most fractured wells should have a large initial flow with a rapid decline rate.  More to the point Lucas only has a 15 percent interest in this well (and a similar interest in another soon to be drilled well).  These are valuable assets but they are not huge assets.  (The value of course being dependent on the decline rate which you would expect to be high - but is at the moment unknown.)

But that is not what the stock market thinks.  Lucas has traded from a low of below $2 in late February to a high above $4.50 on Friday.  More to the point the volume has gone ballistic – 800 thousand followed by 20.7 million, 10.6 million and 25.5 million shares.  The average holding period of the float is now under a day.  These are large numbers as the trading float is probably below 10 million shares.

We could be in the world of hyper-trigger day-traders – but I would be surprised if a single one of my readers knew what Lucas Energy was.  Yet the market sees fit to make this - of all things - one of the most actively turned over stocks since the height of the dot-com-day trader bubble (turnover being measured relative to float not in absolute dollars).

What if anything rational explains turning over float quite this fast?

I see two hypotheses – and I don't know how to pick them apart.  One is that there really are a bunch of gunslinger day-traders (or their computers) here and that all-of-a-sudden they see the reason to trade the entire float of this company more than three times in as many days.

The alternative is that this is a pump-the-volume and see if you can attract suckers story.  The suckers of course could include the gunslinger day-traders.

I can't tell – but the SEC has the power to tell – and when a stock with long associations with penny-stock hucksters has volume like that I can't imagine why the SEC are not looking.  If the stocks are doing round-trips amongst a few players faking volumes then a prosecution should be easy. If however day-traders are really behind it then they are even more removed from economic reality than I thought.  (Day traders like this in energy stocks look a little like day traders in tech stocks in 1999.  Not the top - but certainly a reason for thought...)

I just look in wonder.  There is no model I know where turning over the stock of a company three times in three days is a productive way to allocate capital.  But hey – that is just the stock market – and despite doing this for years I still find stuff like this strange.


John

Diversions: Champian Fulton

I live in Sydney and have good weather and beaches.  But I miss things.

Less now: communications are wonderful.

My friend Champian Fulton now has a You Tube channel.

Health care and fiscal reform

This is one for everyone who thinks the US is insolvent.

The US budget is clearly problematic.  Social security is not a big problem (and people who argue otherwise clearly have not thought strongly about the numbers).  Medicare however is a huge problem - and extraordinarily underfunded.

But a picture on the Wall Street cheat sheet shows how large the opportunities are...






The USA health care spend is at least 3000 dollars per capital too high relative to outcomes versus any other OECD country.  It is probably closer to 4000 per capita.  Times 307 million people there is 900 billion to 1.2 trillion dollars on the table in dealing with health expenditure.

I have written about how you might squeeze the roughly trillion dollars out before - but there may be other ways of doing it.  

However that roughly trillion dollars of excess costs is a lot of peoples' income.  They are not going to want to get squeezed and they will lobby (probably very effectively).  It ain't gonna be easy no matter how you do it.

Still any government that gets this right can right America's fiscal situation with almost no other policy action at all.  What others see as waste I see as an opportunity for America - and a reason why America is ultimately more solvent than the bears imagine.

Comments.




John

Weekend reading: Guadalcanal and Australian foreign policy

Brad Delong wrote a short post recommending Neptune’s Inferno as the best book he has read all year.  I tend to read Brad’s recommendations - so - despite it being a long way from my usual reading material I got a (kindle) copy.

Neptune’s Inferno is an history of the Battle for Guadalcanal in the Solomon Islands - the first major amphibious invasion carried out by the Allies in World War II.  It was also - along with Kokoda - a "Battle for Australia"*.  The battle was fought after spies in the jungle reported that the Japanese were building an airstrip that threatened Australian shipping.  (Keeping shipping open to Australia was a core priority of the US Navy - and rather important to Australia.)

Guadalcanal was amongst the Marine’s finest hour.  It was also the hour at which they depended - more than any other time - on support from Navy destroyers - and seamen died in large numbers to provide that support.  The campaign was fought originally without battleships and sometimes without aircraft carriers.  The battleships were in port in California - not because they were not needed but because there was no way to supply fuel for them.  The tankers were in the Atlantic convoys (or on the bottom of the ocean) and Hitler - by removing the tankers removed the battleships from the Solomon Islands.  The aircraft carriers were limited by fuel and by the navy's (understandable) desire to protect them.  In the end there were battleship-to-battleship battles - something that only happened a few times in WW2.

This is not a book review.  If you like military history you will love this.  If your love of military history does not go far from the various books about military incompetence then don’t bother.

I am writing to comment on American/Australian relations.  There were in the Second World War several "Battles for Australia".  One was Kokoda - a battle fought heroically by under-trained Australian ground troops.**  The other was the battle for Guadalcanal - a battle fought by the (well trained) US Navy and the US Marines.  Australians remember Kokoda but do not remember Guadalcanal.  (Most Australians could not identify where it was despite having recent military involvement there.)  However - to be blunt - we owe you.

And also to be blunt - we keep paying.  If the American President asks for Australian support we give it.  We were in Korea, Vietnam, the Iraq-Kuwait episode, Iraq and Australians are still dying in Afghanistan.

The critics on Australian-American relations state that the object of Australian foreign policy is to internationalize the corpses in American wars.  The strongest supporters of the status quo will argue the same thing.  After all - who else can we rely on to bring serious grunt to battles like Guadalcanal?

And thus it will be - Australia will wind up fighting US wars - just or unjust.  And we will send our boys to die with your boys.  And we will do that despite the fact that we do not vote for your Presidents and exercise very little say about what wars we fight.

So whilst I do not vote in the US elections - about half my readers do.  So dear readers - read the Guadalcanal book if you like that sort of thing.  (It is a darn good book in the genre.) But more important please ensure sensible political debates are had on matters of military adventures.  Please.


John

*The term "Battle for Australia" is misleading as there is little direct evidence that the Japanese ever planned a direct invasion of Australia.  The Japanese did however bomb Darwin (and in a minimal sense Sydney).  They also extensively targeted Australian shipping routes.  The Japanese campaigns were clearly targeted at control of Australian waters.  The Japanese invasion fleet repulsed at Coral Sea was probably headed to Port Moresby.

**It is not that the Australian military is poorly trained and hence deliberately sent poorly trained troops to Kokoda.  Its just that our best troops were in Africa at the time fighting the Nazis.  We were in a better position when the African troops came back.

PS.  The (appalling) politics of the Solomon Islands is a direct result of the power structures left behind by Americans at the end of the second world war.  If someone wants to examine the effects of nation building (or the lack-thereof) after military destruction then Guadalcanal (where there is an on-again-off-again civil war) would be a good place to start.  Australia dropped a peacekeeping force on Red Beach in Guadalcanal in 2003 - a reproduction of the original American landing.

PPS.  There was another "Battle for Australia" - also largely fought by the Americans - the Battle of the Coral Sea.  That was one of the major battles of the War - with both the Americans and Japanese losing an aircraft carrier.  The US carrier Yorktown was also damaged - and as a result was lost at Midway.  Coral Sea was the precursor to the Guadalcanal campaign - if the Japanese could not get carrier superiority in the area the idea was to build airstrips on unsinkable carriers (islands).

A small hedge fund manager’s lament

We have just been through six years when almost any company that could be purchased by private equity and was potentially worth purchasing by private equity has been purchased by private equity.  With the exception of about eighteen months, PE firms could issue lots of low yield debt to buy the assets.  I am an equity manager - and in searching for good assets private equity firms are my competition.  I dislike them for it.  (Never have so many Harvard MBAs been concentrated on so many small cap stocks...)

There is only one exception to this - and this exception proves the rule: there are a few small companies that have a dominant (often family) shareholder where the (family) shareholder won’t or can’t sell for personal/legal/structural reasons.  Some of these companies might be reasonable value because the PE firms have not had a look in.  Indeed, we have about 10 percent of the fund invested in companies in France that fit this exception.  One of our most profitable positions has been a German company with a dominant (and immobile) family shareholder.

Private equity funds are also the biggest competitors to other private equity funds.  All this competition means that private equity shops are doing worse and worse deals.  Its got to the point where PE funds buy fake companies (see Carlyle with China Forestry and I suspect others).

Running a small hedge fund, I would usually want to buy small caps on which I had done superior analysis.   Alas, when I look at small caps - even medium caps I keep finding expensive, dodgy and well promoted stocks.  Small caps are a land of shorts.  The good stuff - and then the less good stuff left behind - has been picked over by numerous PE shops.

I do serious research.  I will pay someone to stake out a factory in China and count the trucks going in and out.  I talk to suppliers and customers.  And by and large almost all of that research is no good for finding longs.  You see the PE shops have more resources than me - and when they find something even half way good they issue low yield debt and buy it. The low yield debt that is everywhere is my competition - and I hate competing with someone whose capital costs less than a third of the returns I target.  The low yields that PE funds can issue debt have now resulted in low ex-ante returns for small cap investors.

Large caps by contrast are surprisingly inexpensive (however most of them have warts).

For instance Google - and I am just picking Google - has a PE ratio below 20 when you net the cash out - and has an enormous tailwind.  At the moment there are 3.4 billion cell phones in the world and only about 100 million connect intensely to the internet.  Most of those are iPhones.  In five years time Android phones with the capabilities of a current iPhone 4 will retail below $100 - possibly far below $100.  The dumb phone will cease to exist - and almost all phones will connect to the internet.  Google will dominate that ecosystem.  The tailwind is enormous.  Sure Google faces headwinds too (their search quality is being eroded by spam and Facebook is stealing internet time and even search loyalty).  But in a different environment you might say Google was cheap.

Microsoft is under 12 times historic earnings - and far less than that if you net out cash.  And sure it is problematic (I am writing this on a linux computer and in a few years the dominant computing device will be a phone - probably an Android phone).  But the cash flows look stable enough for now.  And the biggest mobile phone company in the world has just agreed to distribute their operating system.

Vodafone is at a PE well under 10 times - but it has a history where it has never failed to disappoint.  When I told a UK fund manager that my biggest position is Vodafone he looked at me with pity.  (It was of course their biggest position a decade ago - and what they were really feeling was self-pity.)

Now these are not historically stretched valuations - but they are not outright bargains either.  They are however a bargain compared to long term government bonds and they are absolutely a bargain compared to the average small cap.

I don’t particularly want to express a view on inflation or deflation.  Suffice to say we have seen a movie which had an unbelievably brutal deflation.  That was Japan.  Ben Bernanke has also seen that movie - and he has determined that it will not happen in America.  He will expand money supply to stop it.  A deliberate money supply expansion on this scale in response to a huge deflationary threat is an experiment and we do not know the outcome.  It could fail (you know the saying - you can lead a horse to water but you can’t make him drink).  It could succeed beautifully producing 4 percent inflation and getting the economy out of the rut.  Ben Bernanke said on 60 Minutes that he was “100 percent” sure that he could control inflation at the end of it.  I need to stand outside a factory and count trucks before I am 100 percent sure the trucks are not coming - but unless I have a method of direct verification I am not 100 percent sure of anything much.  Bernanke is a little too certain.  Whatever: put a weighted probability on inflation or deflation and you would conclude that long-dated government debt - or a deflation bet - is a very risky bet.  (It may wind up ex-post being a good bet - it may wind up being a terrible bet.  Whatever - right now it is a risky bet.)

Large cap equities scare me far less.  At least the starting valuation is lower.

Warren Buffett wrote an editorial in the New York Times on 16 October 2008 suggesting that people buy American equities.  He had already spent all of his non-Berkshire personal account - so most of his purchases were made with the S&P above 1000.  Warren is not stupid and his return expectations were at least 7 percent per annum.  (He is after all Warren Buffett and he is rather good at this stuff.  Better than me or any of my readers.)

Two years have passed - dividends have been a couple of percent per annum - so the current equivalent level S&P level (allowing Buffett’s 7 percent in the form of capital appreciation) is about 1100.  The S&P is currently about 1300.  Today you are buying 20 percent more expensive than Buffett suggested.  (That does not sound like a bubble to me.)

For most of Buffett’s purchases buying 20 percent more expensive than Warren turned out just fine.  And I suspect it would turn out just fine now too.

So here we are in a strange world where large caps are not bargains - but they are, by and large, not frighteningly expensive.  If you were to buy a diversified pile of American large caps and sit back in a decade you would probably be OK - indeed better than OK.  But small caps - the area on which my expertise would normally be most productively targeted - are frighteningly expensive - and the market is riddled with stock-promotes and outright frauds.

So - with exceptions such as my French and German “family stocks" we are mostly long large caps (eg Vodafone, Google) and short small caps (about 50 names, mostly frauds).

Alas I cannot analyse Google with any degree of precision.  A five year earnings estimate made by anyone at Bronte would be worthless.  I have no idea how many smart phones will be Android tied into Google and how many will be Nokia/Microsoft tied into Bing.  I have no idea how much damage Facebook or even Blekko will do to Google’s franchise.  The world is too big and too complex to pretend we know this stuff.  If you can predict this five years out then you are way smarter than me.

The same is true of most of the large caps in our portfolio.  I think on the balance of probabilities any one of them will be alright.  They are almost certainly going to be alright on average.  Predictions beyond that run the risk of pretending I know more about the future than I do about the past or present.

Still - having the overwhelming feeling that large caps are OK - and small caps disastrous I figured I could focus my attention on finding and shorting really dodgy small caps (which we have done to considerable success) and buying a diversified pool of large caps (where our success has been more limited).  That figures - I can add value on the small caps - it just happens that value has been on the short side.

Picking fund managers

If I figure large caps are on average OK - but that I have no expertise in picking them - then maybe I should buy the listed fund managers.  I understand them - indeed I used to work for a listed equity manager.  Equity managers are levered plays off large caps in general.  If the large cap equities perform well the managers will get flows - and they will perform doubly well.  Fund flows to domestic large cap managers have been terrible for some time - and a possible turn around in them is the source of the double leverage to the upside.

Flows however are not inspiring.  One of the better articles of late has been by Derek Pilecki of the very small firm Gator Capital.  He compares the flows of the majors and suggests buying Franklin Resources (NYSE:BEN).  The flows last year were almost 70 billion - the best in BEN’s considerable history.

We are impressed - but we are not exactly thrilled.  The flows - even at a mutual fund group with way-better-than-average flow data - is dominated by fixed income flows.  That capital going into fixed income is going to yield the intermediate bond rate (a couple of percent) minus fees (low but not trivial relative to a two percent yield) plus something for the extra risk the fixed income fund takes on.  There is no double leverage for us there!

And just to add insult to injury all those flows want to earn a little more than 2 percent - and the easiest way to juice your yield is a buy a few covenant-lite bonds from our friends in the PE shops. Franklin’s fund flow increases - rather than decreases - my lament about this market.

And thus this dumb-and-annoying market goes on.  We don’t want to fight: fighting the tape can be awfully expensive.  But whilst we won’t fight it we also don’t want to dance just because the music is still playing.

And hence we focus on diversified fraud shorts because we can add real value.  And the rest is invested very conservatively (meaning large cap equities).  We are adding little to no value there - but at least it is “better than bonds”.  Combined we are doing alright (indeed quite well) - but it is a day to day struggle.  Moreover whilst the frauds can be interesting - its a niche concern - and, besides, most of them I can’t or won’t write about.  So, for my readers, it results in less interesting blog posts.

Yours in lament.




John

China Agritech: Getting Wayne Tsou of Carlyle to explain Chinese excellence in nanotechnology production

China Agritech - as has been discussed in previous blogs - manufactures and loads 200 thousand tonnes of dry fertilizer and 13 thousand tonnes of liquid fertilizer using a mere 105 manufacturing staff and just over 6 million dollars in capital.

Obviously these staff are super-strong - as just filling and sewing closed the fertilizer bags and loading the trucks would be problematic.  My previous posts have focused on the Herculean efforts of staff just loading trucks - and only at the Anhui plant.  The rest of the company of course has to be much bigger than that.

It also appears that the manufacturing is considerably more sophisticated than I thought.  For example [China Agritech has] combined innovation and technology in [their] liquid and powder products utilizing nano-honeycomb embedding technology and microelement deep complexing, which makes them more environmentally friendly and effective with a higher content of nutrients than traditional organic fertilizers.

This is pretty sophisticated stuff.  Most companies doing nano-production measure their output in something ranging from thimbles to maybe one or two tonnes.  A123 has - as I have blogged about earlier - had enormous expenses in scaling their manufacturing.

But China Agritech is special.  It does nano-prodution using sophisticated things I do not understand (like nano-honeycomb embedding technology and microelement deep complexing) on the scale of hundreds of thousands of tonnes per annum.  And it does it with minimal staff and just over $6 million in plant and equipment.

Whilst I do not understand how they do it fortunately we have a highly qualified guide.  His name is Wayne Tsou - and he is the managing director of Carlyle Asia Growth Partners.  He is of course entirely suited to the job.  He not only has a Juris Doctor from the Harvard Law School - he is a scientist!   He has a Master of Science from CalTech and a Bachelor from University of Michigan.  Sure he is an electrical engineer by training - but so is my business partner and I don’t hold that against him...

Anyway Wayne Tsou has (at least before the controversy) vouched in the press for China Agritech and their technology.  To quote: "we [Carlyle] are encouraged by the Company's current operations and future outlook. Carlyle always has been active in investing globally in technologies and companies focused on sustainable development. We intend to continue to provide resources and assistance to help China Agritech achieve its strategic goals and expand in the Chinese agricultural market."

Fine words - and as Carlyle is a fine firm I presume those words are backed by actions and that Carlyle really is in there helping China Agritech with its technology.  And that Wayne Tsou can explain what is meant by nano-honeycomb embedding technology and microelement deep complexing.

I only wish he would.

You see I have approached Mr Wayne Tsou to answer questions about Carlyle’s involvement in China Agritech and what contributions Carlyle made to their technology.  Like the other Carlyle participants in this well promoted stock Mr Tsou has been strangely silent.

Nonetheless Carlyle is a reputable firm - and if they say they are dealing with someone who can manufacture nano-products on a vast scale without much in the way of staff or capital equipment it is not for me to disbelieve them.  If they think investing in nano-honeycomb embedding technology and microelement deep complexing makes sense - then I presume they did some due diligence.

But I am an ornery mongrel.  I remain short.


John

China Agritech: more miracles in the plant

This post continues to demonstrate the super-human staff of China Agritech.  It is proof that the US cannot possibly compete with the Chinese in any total factor productivity sense.

I covered the super-hero status of China Agritech's staff in a previous post.  To recap the Anhui plant of this company  - according to company filings - manufactures 100 thousand (metric) tonnes per annum of dry fertilizer.  My estimate (again based on the corporate accounts) is that the plant uses just over $2 million in capital equipment and somewhere between 30-40 staff to do this.

100 thousand tonnes is 2.5 million 40kg bags of fertilizer.  This fertilizer has to be manufactured (something that normally requires some plant), put into bags, have the bags sewn shut and then loaded onto trucks.  These staff may look like Clark Kent - but underneath their clothing are men-of-steel - men who ordinary companies cannot hope to match.

To further demonstrate the utter superiority of China Agritech and their staff the company have released a further 11 photos of their Anhui plant.  (Peculiarly these photos are labelled 1 to 13 on the China Agritech website - but photos 8 and 11 are missing.)  

None of these photos deal with the manufacturing of the fertilizer - something that is usually capital and manufacturing intensive - all we see is a spartan bagging plant and the Chinese Adonis who ply the floor.

This is the land of superhuman staff.  Remember 2.5 million bags per year is 17.4 bags per minute, 8 hours per day, 300 days per year.

Photo 1

This is a photo of some trucks.  Obviously it contains none of our super-heros but it gives you a scale of what they load.  Assuming the trucks carry 60 tonnes they have to load 1666 of these per year - say 5.5 per day based on a 300 day year.  Maybe 5 per day if there are more than 300 working days per year.

Photo 2

This is just another photo of the trucks.  The number plate has been pixelated.  However we can begin to get an estimate of how many bags go on a truck.  This looks like about 20 bags high, 15 bags long and 4 bags wide (ie 1200 bags) plus another few hundred bags on top.  Call it 1500 bags.  That is my 60 tonnes.

Note the bags on the trucks are not sitting on pallets suggesting fork lifts were not the main way of loading this truck.

Photo 3

This is our first photo inside the plant.  We see some bags on the ground (no pallets).  We also see an a loading chute and an industrial sewing machine with two (large) white spindles.  These are used to sew the bags closed.  In all the photos we only see this machine so if the needle breaks or the thread runs out we stop loading.  Moreover we do not see good automated ways of handling the bags around the sewing machines which suggests the bags are lifted up.

Photo 4

Now we see two of our superheros - strangely standing on a pallet - but putting bags on the ground.  Thees bags are clearly labelled China Agritech (note there are no such labels on the bags on the truck).

The superhero on the left has his back arched.  He has clearly not seen any of the literature on the correct way to lift heavy loads - if he were an ordinary person he would be stuffed within hours of this work-pace - but he is a superhero (along with all the other Chinese superheros).

Photo 5

In Photo 5 we eventually see a forklift.  The bags are not on pallets on the truck - but they are lifted up to the truck level using pallets and forklifts.  This will of course reduce the workload our heroes face.  So far the time-and-motion study is peculiar.  The fertilizer is manufactured in a part of the plant we can't see.  It is taken by conveyor belt to a loading chute and then - by hand - moved to an industrial sewing machine.  The loaded bags are stacked on the floor.  They are then re-stacked onto pallets and then moved by fork-lift to truck level.  (I point out that most factories have an elevated loading deck so that all the heavy stuff starts at the level of the loading tray of the truck.)  After that they are taken off the pallets to be loaded onto the truck (presumably by hand).  (I presume they loaded the trucks in the first two photos - though we should note that the labels of the bags disappear...)

Photo 6

Photo 6 we have one pallet load being moved by a forklift.  All the rest of the super-heroes are standing around.  I remain puzzled as to why the other bags are not on pallets - after all I presume the too will also be moved by a forklift.  [There is an alternative explanation - which is that the bags are being delivered to the Ptomkin Village by forklift...  that would explain why in photo 4 we mysteriously see bags being taken off the pallets by our superheroes.  However that explanation does not hold up - because in this photo people are milling around the sewing machine - and they look to be sewing up a bag.]

Photo 7

Photo 7 proves the point that the sewing machine and loading facility is being used.  The dropping of fertilizer into the bags (understandably) creates dust.  Our staff must work in that dust - and so now they have donned dust masks.  They must however sweep this factory incessantly because there is no big piles of dust on the floor - limited footprints and the like.

We also see - for the first time - a tool which explains our heroes amazing productivity - a lifting trolley.  Its a pretty simple one - but hey - its a tool.  Maybe our heroes are human after all.

Photo 9

There was no photo 8 on the website so we skip to photo 9.

Interestingly the bags have all changed color and there are lots more of them.  They are loaded onto some dolly-intermediate size truck whereupon they will need to be loaded onto the main truck.  The handsome Adonis capable of all this heavy listing are absent.

Photo 10

Our handsome Adonis is back.  He is putting a bag on the pallet - or is he taking it off the pallet.  Anyway it is yet another piece of manual handling of heavy bags.  Still he is strong - and he must be amazingly productive.

There are several more superheroes in the background.  They are also fiddling with bags - but none is actually lifting.

Finally we now have two lots of bags - one yellow with a hard to read logo - the other white with no logo.  The stuff on the ground (and coming out of the white bags) is black whereas the dust in the other room is white.  Obviously we are dealing with multiple products here.

Photo 12

Photo 11 is missing - so we jump straight to photo 12.

We have a fully laden truck we are now moving away.  This one contains bags with the China Agritech logos on them.  Again the bags are lifted to truck level using a forklift - but they are loaded onto the truck without pallets.

Photo 13

We are back in the factory.  Some bags are on pallets.  Some are not.  The white dust that required dust masks is gone attesting to the efficiency with which this plant is cleaned.

Some notes

This plant represents half of the dry fetilizer the company produces - and a substantial portion of the company revenue.

The stock price of China Agritech has fallen from 30 dollars to 8 dollars (with most that fall happening before any shortseller went public about their concerns).  The market cap is still 165 million dollars.

If you look at the equipment and plant shown in these slides you do not see anything that looks like even 5 million dollars - let alone a substantial fraction of the market cap.  But that is not what you are buying.

You are buying Adonis - nah - Adonis times 105 (the total manufacturing staff of the company).  No workers anywhere in the world demonstrate this sort of productivity.

Market cap of the company: 165 million dollars
Value of the plant: not very much
Owning your bit of 105 Adonis: Priceless.



John

China frauds that kill people

Rock climbing equipment is sold by name and reputation.  There is not a government standard but climbing equipment is tested to destruction by the International Mountaineering and Climbing Federation (the UIAA).  The UIAA produces one of the best private safety standards in existence.

Now to add to children's toys containing lead there is fake climbing equipment coming out of China.  Petzl - a reputable manufacturer - has been putting out warnings about equipment which copies their logo and stamps but does not meet UIAA standards.  The equipment fails under 70 percent of required test loads.

The Chinese frauds I write about will hurt you financially.

This Chinese fraud will splatter your brains on the ground.

Whilst it is trite to say fake rock climbing equipment is a geo-political issue fake rock climbing equipment and lead in toys will fan protectionist flames - and I doubt that will be constructive.

Bluntly: corporate manslaughter through fraud is something no civilized society takes lightly. This is headed in that direction.


John

China Agritech: China's amazing productivity levels

China Agritech has put out an eight page shareholder letter rebutting claims of short sellers.  Readers know that in the past I have been inclined to take such letters under extreme caution.

But in this case I take the company statements as the gospel truth.  They illustrate just how miraculous Chinese productivity levels are.

Firstly China Agritech claim all their production facilities are working normally and give a few addresses.  (The addresses differ from the addresses in the 10K – a new complication.)  They also give some photos.  Here are the photos given of the Anhui facility.

The gate to the Anhui facility is the same one photographed by Lucas McGee – the shortseller who put out the scathing note on China Agritech.  [There has been some difficulty finding that facility.]

These photos from China Agritech – combined with the annual report - allows us to illustrate amazing total factor productivity levels in China.

The annual report gives the company staff numbers:

As of December 31, 2009, we had approximately 305 full-time employees, of which 45 were administrative and managerial staff; 150 were sales staff and 110 were manufacturing workers. We also hire temporary manufacturing workers to supplement our manufacture capabilities at periods of high demand.

The company has three dry fertilizer plants and a liquids plant.  The Anhui plant however is half the total dry fertilizer – so at a guess it represents about a third of the plant and equipment and a third of the staff.  (This is just a good educated guess – but the analysis would apply to all the other plants as well.)

So lets suppose – just running these numbers – that say 37 staff work at the Anhui plant (that is a third of the manufacturing staff).

The Anhui plant – also according to the annual filing – produces 100 thousand (metric) tonnes of dry fertilizer per year.  The bags in that photo are 40kg bags – so they produce 2.5 million bags per year – and they do all that with 37 staff.

The photograph – the elusive loading facility for which I searched – shows less than 100 bags - loosely - and I would guess manually - stacked on top of each other.

To move 2.5 million bags of fertilizer annually you would need an enormous army of manual workers whose muscles bulged like Popeye or machines.  I presume you would use machines.

I am not a factory guy – but I presume fork-lifts would be pretty basic equipment.  But if they used fork-lifts then the bags would be loaded onto pallets (again I am not a factory guy - but I am used to seeing pallets).  Instead – and here is the photo again – they are stacked somewhat irregularly on the ground.

These workers are amazingly strong.  They move 2.5 million bags of fertilizer with nary a fork-lift.

Of course there could be some heavy moving kit outside the photo.  So I went looking at the accounting for property plant and equipment.  Here is an extract from the last annual:

Yes – that is 5.8 million of gross manufacturing equipment and 0.6 million of vehicles.  A third of that equipment (my estimate) should be at Anhui.

So with just over $2 million worth of equipment the company claims to be able to manufacture and load 2.5 million bags of fertlizer per year.  Oh, and they do without an enormous army of low-paid workers – but a mere thirty-something superheros.

America is forever stuffed.  Westerners can never compete against this.




John

Disclosure: Bronte remains short China Agritech (indicating we do not think the above calculation should be taken very seriously except as an exploration of the accounts and claims of the company).  "Anne" Wang Zheng - the Carlyle nominee China Agritech's board has still not got back to me.  Perhaps she can shed more light on these amazing productivity levels.