Senseless Chinese capital expenditure: Trina Solar edition

The one thing we know about the solar panel industry is that it is glutted. Solar panel prices are collapsing as has been observed many times on this blog.

Trina Solar reported yesterday. Bad numbers as expected. To quote them as to the glut:

Despite this achievement [which in Trina's case was increased sales], growth in worldwide module capacity and peaked channel inventory resulted in significantly lower product prices which adversely affected our bottom line results, whereby our cost reduction was not sufficient to offset lower ASPs [ie average selling prices].

I promise you I am not telling anyone anything new here. If you are an investor in the solar-panel industry and have not noticed a supply glut then you are completely non-observant.

What is strange though is that despite the supply glut the capital expenditure in this business - that is building new plant and machinery - goes on regardless.

Here is a line from the balance sheet:

Trina Solar Limited
Unaudited Consolidated Balance Sheets
(US dollars in thousands)
		December 31,		September 30,		December 31,
		2011		2011		2010
Property, plant and equipment		919,727		783,328		571,467

Property plant and equipment at Trina went from 571 million to 920 million in one year. And in the year when the industry became hopelessly oversupplied.

Moreover the rate of increase accelerated in the fourth quarter when the oversupply was obvious to anyone to see - when anti-dumping cases against loss-making Chinese solar panel makers became vogue.

There are lots of things that might be going on here. The company might have a great new technology which is worth investing in even though the industry is glutted (indeed the company points to its "honey" technology). Or the company might be insane. I have my thoughts but I do not have enough knowledge to be certain.

But one friend suggested that this is just an analogue for all of China. Who cares if office buildings are glutted? Just build more. Who cares that the high-speed-rail between two cities you have never heard of, a railway line that consumed valuable steel and concrete by the millions of tonnes is mostly run at a third capacity with empty trains? Build more.

"Build it and they will come" may be the Chinese mantra. Usually only works in Hollywood films.



John

PS. I should disclose that Bronte still has a short-biased straddle on Trina - but it is a much smaller position. We closed a fair bit for profit - but traded that bit not so well. I should have covered the short end more aggressively when the stock was $6.

Titanium Asset Management - notes on paper trading and murder

There is a story in the Sydney Morning Herald today about Titanium Asset Management - a funds manager in Western Sydney that operates as part of the Titanium Financial Group.

Titanium has been on my must-look-at list for some time. I found them when researching Astarra/Trio - a funds management fraud shown to me by one of my readers which I reported to the regulatory authorities. Titaninum had agreed a white-label deal distribution deal with Astarra, a deal which to the best of my knowledge was never consumated with real money. Titanium said that there was no relationship with Astarra but one Titanium entity wound up in the hands of the Astarra/Trio liquidators. [Someone has suggested in the comments that the Titanium entity in the hands of the Astarra/Trio liquidators is not related to the Titanium financial planners and that no money ever changed hands with the agreed white-label deal linked above. I see no reason to disbelieve that - especially as the article is dated within a month of the demise of Astarra/Trio.]

What amazed me though was the returns of Titanium Asset Management. It was limited according to its documents to being long-short the stocks in the ASX200 (an index of the top 200 companies in Australia). These were the monthly returns as reported:

These returns are astounding. 40 percent in October 2008, 20 percent in February 2009. Magic numbers really.

So I rang the fund manager - Peter Rice - to try and work out how he did it. I did not understand - at least it did not make sense to me so I reported my concerns to ASIC.

I did make an effort though. I found an interview with Peter Rice on Sky News (repeated below). That made no sense either.



Anyway I put it out of my mind.

A couple of weeks ago I looked again. Here are later returns.

The early months had all gone. (No more 40 percent months!)

The return in February 2009 had gone from plus 20 percent to minus 7 percent.

I was puzzled.

I rang the auditor as listed in the original product disclosure status. He sounded sorry for me - wondering if I was an investor in the fund. He told me he had never been the auditor and had gone to some lengths to let the regulator know that he was falsely listed as the auditor.

I rang Peter Rice and he told me the original returns came from "paper trading". I wondered why he did not tell me that the first time I rang and he said that he did not believe he was under an obligation to disclose that. (Indeed when I rang him the first time he told me that he had an independent back office and used Citigroup as his prime broker - both things that would not occur if the profits were from paper trading.)

I sent it all to the Sydney Morning Herald. (My job is to manage money - not explore these things...)

I think Michael West did a great job of the story.

He also pointed out something that truly surprised me. Andrew Blanchette who controls Titanium (at least is listed on the license and is the owner of the domain names) was once the boyfriend of Sydney model Caroline Byrne. She was found dead at the bottom of Sydney suicide spot The Gap. Maybe suicide. Maybe murder.

Caroline's death was the subject of much gossip in Sydney - the prime suspect was Gordon Wood. Wood was Caroline's boyfriend at the time of her death and was also the chauffeur to Rene Rivkin a colourful Sydney stockbroker. Rivkin has since committed suicide.

Wood was convicted but since then Australia's highest profile current affairs program has thrown that conviction into doubt.

This mostly proves that Sydney is sometimes a very small town. No more.



John

Why Falcone's plan B should be rejected

I have an old computer under my desk. Its a Toshiba laptop from about 1998. I run Puppy-Linux on it because it can't run anything more powerful.

Its good for purpose - a low powered device.

I am told by the physicists that if I use it for high-powered uses I will blow circuits and destroy my the local network.

So I go to the Department of Defence and say can I swap my old low-powered device for your high-powered supercomputer?

Of course they would laugh.

Now the WSJ is reporting that Phil Falcone has a Lightsquared Plan B. He wants to swap his spectrum which is specifically only available for low-powered use for the Department of Defence's spectrum, spectrum which is available for high powered use.

The Department of Defence should just laugh.

If this gets past the just-laugh stage I worry for American democracy. If this actually happens we know the scope for corruption in America is unlimited.

If the DOD wants to part with its valuable spectrum just auction it. Giving billions of dollars to fading - soon-to-be-bust hedge funds. That is beyond any semblance of decency.

Phil, for the sake of decency and because you are ultimately a patriot - just put Lightsquared in Chapter 11. Leave the corrupt obtaining of public assets to Chinese billionaires and Russian Oligarchs. You are better than that.



John

Why Phil Falcone is like the most loopy left-wingers in America

Alan Sokal, a Professor of Mathematics at University College London and a Professor of Physics at New York University published this in Social Text - a peer reviewed left-wing journal of post-modern thought published by Duke University Press.

But deep conceptual shifts within twentieth-century science have undermined this Cartesian-Newtonian metaphysics1; revisionist studies in the history and philosophy of science have cast further doubt on its credibility2; and, most recently, feminist and poststructuralist critiques have demystified the substantive content of mainstream Western scientific practice, revealing the ideology of domination concealed behind the façade of ``objectivity''.3 It has thus become increasingly apparent that physical ``reality'', no less than social ``reality'', is at bottom a social and linguistic construct; that scientific ``knowledge", far from being objective, reflects and encodes the dominant ideologies and power relations of the culture that produced it; that the truth claims of science are inherently theory-laden and self-referential; and consequently, that the discourse of the scientific community, for all its undeniable value, cannot assert a privileged epistemological status with respect to counter-hegemonic narratives emanating from dissident or marginalized communities. These themes can be traced, despite some differences of emphasis, in Aronowitz's analysis of the cultural fabric that produced quantum mechanics4; in Ross' discussion of oppositional discourses in post-quantum science5; in Irigaray's and Hayles' exegeses of gender encoding in fluid mechanics6; and in Harding's comprehensive critique of the gender ideology underlying the natural sciences in general and physics in particular.7

It was of course a hoax, part of a long and very funny article titled "Transgressing the Boundaries: Towards a Transformative Hermeneutics of Quantum Gravity".

To Sokal the article was a modest (though admittedly uncontrolled) experiment: Would a leading North American journal of cultural studies -- whose editorial collective includes such luminaries as Fredric Jameson and Andrew Ross -- publish an article liberally salted with nonsense if (a) it sounded good and (b) it flattered the editors' ideological preconceptions?

The answer was unfortunately yes.

And it was self-evidently nonsense. The quote I give you above includes that physical "reality" [and note the "scare quotes"] no less than social ``reality'', is at bottom a social and linguistic construct. Sokal invites "anyone who believes that the laws of physics are mere social conventions to try transgressing those conventions from the windows of [his] apartment. (He lives on the twenty-first floor.)

I will observe when the physics has something useful to say and its an argument between left-wing social theorists and conventional physics the physicist wins. Conventional physics is (at least within the distances and energy levels we can measure) very settled science - and to say novel things you need to go to minute sizes or massive energy levels (as per the Large Hadron Collider).

The Sokal hoax was funny - but it was hardly necessary. The social sciences whose response to hard science is to deny it are best ignored. Unless you have Alan Sokal's sense of humour it is not even that much fun teasing them.

Anyway - this sort of anti-science based obscurantism has historically been the province of the Left. I mean who other than a left-wing loopy intellectual would think that the reality described by conventional physics is a social construction - a conspiracy of physicists. And a physical reality they can save you from by deposing the hard (and testable sciences) so they can install themselves as a priest-class who understand this social construction stuff (not to mention the obscure jargon in my opening quote).

Oh I know who gives these self-indulgent and self-important left-wingers a run for their money. The new anti-science conspiracy theorists are on the right. Evolutionary biology is a conspiracy of godless liberals who want to undermine God's laws. Climate change is a conspiracy to allow Government more control over your life.

It is funnier when it is a bunch of academics. History has a way of sending the loopy ideas of academics to the obscurity they deserve. It is less funny when it is politicians.

But this is not a blog about the anti-science elite in politics and academia. Its a blog mostly about financial markets and their goings on and all the crappy things you can invest in.

When people in financial markets behave that way - believing their socially constructed reality over physics - then it is time to go short them.

There are few technology companies out there (and sorry I will not name names because I don't want to make the shorts crowded) whose basic premise seems to conflict with the second law of thermodynamics. [Not understanding the second law of thermodynamics is to science what not being able to read is to literature.]

But when you see this stuff in markets you have just got to short it. I know rich people who are usually smart who invested in Blacklight Power. I just could not work out a way of shorting it.

It requires a special-brand of delusion to construct your world such that basic science does not apply to you. Its the brand of delusion that the fools from Social Text have. Its the brand of delusion that some of America's more loopy right-wing politicians have.

Alas it is also the brand of delusion that Phil Falcone has. It was the brand of delusion which powered Lightsquared.

The physics of radio interference is settled. This is physics at ordinary distances and ordinary energy levels. (To find non-settled physics you need to shorten the distances and raise the energy levels as per the LHC.)

We know this stuff.

We know that if you put a low power radio station near a high powered radio station the high-powered station causes interference. We understand resonances between different frequencies.

As I said - this stuff is settled.

But that did not stop Phil Falcone investing his clients money in a loophole - an attempt to take spectrum which was allocated to low-powered devices (satellites) and wish to use it for high-powered devices (mobile phone towers) and to think everything would be OK. I wrote about it recently - but have had the view for some time. And it was in contradiction to physical reality (and this time I did not put "reality" in scare quotes because that reality is really real).

Phil Falcone is almost certainly smarter than the idiots who edit Social Text. But years of success and the strange cocoon of being a Wall Street billionaire got Falcone to the point that he thought that reality did not apply to him.

He became just like the most loopy of left-wingers.

Still Lightsquared is dead - the FCC has now determined that the conflicts with GPS are not able to be resolved. That is a fatal blow to Lightsquared (and I am glad). It means that parts of the government (like Defence who value their GPS) still have a say and that anti-science obscurantism is not everywhere - just on the far-left, far-right and in the minds of some particularly self-indulged Wall Street types.

There is hope in the world.



John

Dear Shareholder: the woman from the Propaganda Department will now provide you information

Universal Travel Group - a Chinese company whose stock is now suspended - is no stranger to my readers.

If you need a background the initial post is much fun:

Travelling through China with the Universal Travel Group

Six months after I wrote that post (which suggested that the Universal Travel Group was complicated) the stock was suspended. The auditor (the fifth) resigned.

Normally this means that the company winds up trading on the pink-sheets and the stock goes asymptotically to zero.

Not this time though. Universal Travel seems determined to clean up its accounts and trade again on the New York Stock Exchange.

They have hired a new auditor.

They appointed a new Chief Operating Officer.

And they appointed a new board member.

This new board member is probably very good at spin - which will be useful as the company tries to persuade the New York Stock Exchange to reinstate its listing.

Here is her CV:

Ms. Moling Shang has served during her career in several jobs in the communications division of the Central Committee of the Communist Party of China (CPC). From 1984 through 1996, Ms. Shang was the Chief of the Propaganda Department in the Information Bureau of the CPC's Central Committee. From 1996 to 1999, Ms. Shang served in numerous positions including Associate Director of News Agency for China Central Television and her previous role as the Chief ofPropaganda. Following her successful completion of her previous roles, Ms. Shang was appointed Deputy Chief of Propaganda in the Organization Department of the CPC Central Committee where she was responsible for the Three Represents campaign from 1999 through 2002. From 2002 to 2010, she served as Deputy Chief of the Information Bureau of the CPC Central Committee. Ms. Shang graduated from the Branch School of Peking University.

She is the former Deputy Chief of Propaganda of the Information Bureau of the Communist Party of China Central Committee.

I am sure she will keep shareholders informed.



John

Stocks: you can fondle them and they might put rohypnol in your drink and steal your wallet. A comment on Warren Buffett's recent fortune piece.

Warren Buffett recently wrote an article in Fortune (a cut from his forthcoming shareholder letter) which explains why he prefers owning businesses (either outright or through the stock market) than owning currency based investments (bonds, cash) or gold.

Buffett's writing and thinking is a model of clarity. Kid Dynamite's highlighting and analysis is a worthy follow-up.

Buffett does not like bonds or cash as investments because they are (in his view) unlikely to retain their real value over the medium to long term. In God we Trust - but the hand that activates the printing press is human. Buffett defines investment return in real goods and services - investment is putting away some spending power now in the expectation of having more spending power later. Bonds and cash make nominal returns. Buffett thinks real returns are unlikely and disastrous outcomes are possible: "[currency based investments] are among the most dangerous of assets. Their beta may be zero, but their risk is huge".

Quoting Shelby Davis he notes that at current yields currency based investments offer return free risk.

Though unstated you can tell Buffett does not predict a Japanese outcome. Twenty years of deflation would make bonds a fantastic investment by Buffett's criteria. That is a possibility he does not even entertain...

Buffett is not fond of gold either - waxing lyrical on its uselessness. The world gold stock if melded together would fit in what he views as a useless 68 foot cube. Think of it as sitting comfortably in a baseball infield.

And he notes the extraordinary value of that cube. At current prices that cube would buy all the agricultural land in the United States, sixteen companies as valuable as Exxon and leave you a trillion dollars in walking-around money. He cannot imagine why you would prefer own the cube than the alternative assets. Similarly he can't imagine why you would want to own a bit of that cube than an equivalent bit of the alternative assets.

Over the next century 16 companies as valuable as Exxon will have thrown of trillions in dividends - and the agricultural land will have thrown off huge quantities of wheat, corn, beef and other valuable commodities.

The gold will just sit there.

The best line in the article is one of Buffett's sexual zingers: you can fondle the cube, but it will not respond.

He is right of course. Some people think that gold is a good investment because it has retained its value (measured in agricultural land) for centuries. That is all the proof you need that the investment is stupid. The agricultural land had a yield all that time. The gold probably got stolen - and had no yield.

Buffett's prescription: own productive assets.

And that is good advice if you pick productive assets with competence. If you don't I think the Buffett prescription can be a recipe for disaster.

You see the gold does not have free-will - or any will for that matter. Fondle it and it does not respond.

Stocks and businesses however have people running them - and people range from clever to inanely stupid. Integrity levels cover the spectrum from someone you would hope would marry your daughter to Bernie Madoff.

Willie Sutton robbed banks because that is where the money was. Now the money is on Wall Street. If Willie Sutton was reincarnated he would come back as some Wall Street scumbag (or an investment banker). And on Wall Street he would almost certainly not be prosecuted. People who rob banks get prosecuted. People who steal via the stock market not so much.

Because the scumbags go where the money is Wall Street is particularly thick with scumbags. Wall Street has tens of thousands of Willie Suttons.

Fondling stocks can be very profitable if you know what you are doing - especially over very long time periods. But the proviso is there ... if you know what you are doing.

Previously Warren Buffett observed that risk comes from not knowing what you are doing.

And gold is pretty easy to understand. It just sits there. People however are difficult to understand and sometimes dangerous - and people and the stock market are intertwined. And you are more likely to find a scumbag in the stock market than internet dating (the scumbags have Willie Sutton motives).

If you do not know what you are doing fondling stocks can be either as much fun or as dangerous as fondling people. Some may respond by being nice back. Some will spike your drink, lift you wallet and sodomize you on the way out.

Mr Buffett makes it seem simple. I love reading him - but sometimes I think he is dangerous because he makes it seem so easy that it lulls people into a false sense of security...




John

PS. Positions: no gold. Long companies with high levels of management integrity and decent valuations. Short scumbags, slimeballs and villains. Names can be left out of this piece.

Diamond foods - what the press releases says and does not say...

Diamond Foods is a short-battle-ground stock. Anyone who looks at Herb Greenberg's twitter feed can see that. Herb loves battlegrounds.

Today the company made a repetitive press release that has me reading between the lines. Here is the guts of the release:

[The company] today announced that the Audit Committee of its Board of Directors has substantially completed its investigation of the Company's accounting for certain crop payments to walnut growers. The Audit Committee has concluded that the Company's financial statements for the fiscal years 2010 and 2011 will need to be restated. Over the course of the last three months, the Audit Committee has carefully reviewed the accounting treatment of certain payments to walnut growers.  The Audit Committee has concluded that a "continuity" payment made to growers in August 2010 of approximately $20 million and a "momentum" payment made to growers in September 2011 of approximately $60 million were not accounted for in the correct periods, and  the Audit Committee identified material weaknesses in the Company's internal control over financial reporting. 

The Board of Directors is taking a number of corrective actions including the appointment of a new Chief Executive Officer and Chief Financial Officer.  Effective immediately, the Board has appointed Director Rick Wolford to serve as Acting President and Chief Executive Officer and Michael Murphy, of Alix Partners, LLP, to serve as Acting Chief Financial Officer. The Company is commencing searches for permanent replacements for the CEO and CFO positions.  The Board has also appointed Robert J. Zollars, who previously served as Lead Independent Director, to the position of Chairman of the Board. Michael J. Mendes and Steven M. Neil have been placed on administrative leave from the Company.

I have read the whole release - but there is no additional information.

I know relatively little about this company - indeed I did not bother looking because the short was crowded and the product (Kettle chips and walnuts) seemed OK. But this release had me puzzled.

The offence as described - moving $20 million of expense from one year to another in one year and $60 million in another year seems relatively minor. But the sacking of the CEO and CFO and the appointment of Alix Partners seemed less minor.

Still timing offences (and they admit timing offences) must be measured relative to earnings.

The last 10K (since amended and now withdrawn) shows nicely growing income in excess of $50 million.

$26 million in net income and about $50 million in the next year. If you were to add $20 million of expense to 2010 and $40 million (the net amount moved) to 2011 and tax-effect those amounts the profits drop from a net $26 million to $14 million for 2010 and $50 million to $22 million for 2011.

That is pretty nasty. But not terminal. Still there are 21 million shares outstanding and at the after-market price ($21 down 42 percent) that is still 20 times earnings.

It does not look like a salivating buy at 20 times. Not close.

And the loss of the CEO and CFO does matter. There is seldom only one cockroach.

The thing that gets me though is the appointment of the new CFO. Michael Murphy is from Alix Partners and his CV makes it very clear that he specializes in restructuring debt. Alix do a lot of bankruptcy work (though that is not the only thing they do).

The last balance sheet (also since withdrawn) is amusing.

It shows cash of just over $3 million, some short term debt and long term obligations of nearly half a billion dollars. And - given the restatement - we can guess this thing only earns just over $20 million a year - and even that presumes the absence of further cockroaches.

I shorted some in the after-market. Don't do that often - but am quite pleased with myself.



John

Lightsquared - some comments

I usually find Senator Charles Grassley's attempts to provoke spats with big-name hedge fund managers tendentious. But in his spat with Falcone and Harbinger he is right on the money. Lightsquared deserves to fail and Grassley knows it.

If you don't know the background start with Bethany McLean's excellent article on Phil and Lisa Falcone in Vanity Fair. I think McLean tries too hard to be balanced on the key policy issue of spectrum and Lightsquared - but McLean offers a good introduction to the issues. By contrast Grassley is not balanced but he is right. Here is why.

There is an international body that administers a binding international treaty on how spectrum should be allocated. That body is the International Telecommunications Union.

The rules need to be binding because otherwise one country's communications build-out could jam communications from another country. This is particularly important where countries are densely packed (like Europe) but is also important in the Americas especially regarding satellite spectrum. (After all spectrum use by Argentina could interfere with spectrum use by the United States if that spectrum is used by a geostationary satellite.)

The biggest conflict is between satellite spectrum and terrestrial spectrum. Satellites are a long way away (in geosynchronous orbit they are 35,786 kilometres above the equator). Because they are a long way away the signal is not very powerful and you often need a dish to catch enough signal to make it usable. Being a very weak signal you need to ensure that there is no very powerful signal in the same spectral region. A powerful signal will block a weak signal just as surely as a big city radio station can drown out a less powerful regional station a little further up the (frequency) dial.

The ITU's job is to make sure this does not happen. The treaty for instance stops Canadian land-based radio devices jamming distant (and hence much weaker) American satellite devices and vice-versa.

The first thing the ITU does it allocates some spectrum as global spectrum (mostly for satellites but also for communicating with ships at sea and similar) and other spectrum as terrestrial spectrum which member countries can allocate however they want. After all there is little international issue in land-based spectrum because interference is basically local. (A cell phone in New York does not interfere with a cell phone in London or visa-versa – so the allocation of terrestrial spectrum in London can be done independently of the American Government or vice-versa.)

Generally satellite spectrum is given away or sold very cheaply – but it comes with obligations. The main obligation is to build out some (normally global) social network (eg communication to remote areas or ships at sea). Terrestrial spectrum is auctioned by local governments and often carries the right to build a cell phone network. That spectrum is hugely valuable and is auctioned for billions of dollars.

There is an underlying global policy issue here – which is that cell phone use is growing like crazy and the real shortages of spectrum are for cell phones rather than for satellites. The iPhone and other internet devices are the core culprit and the inability of many of my readers to use their iPhone in New York City is testament to that.

In an ideal world some of the spectrum allocated to satellites would – over time – be shifted to domestic use and auctioned by the local authorities. This can't be done fast because businesses have satellites in space at the cost of several billion dollars and you can't just render them useless by drowning their signal with (nearer and hence much stronger) domestic signal.

Enter Phil Faclone and Lightsquared. Lightsquared gets access to some satellite spectrum cheaply and then ploughs headlong into a loophole in spectrum laws. The loophole is this: satellite spectrum licenses allow the construction of ground-based booster stations to retransmit their signal and hence make it more useful. The example envisaged is say a remote town in Alaska needs a 6 foot dish to receive the signal (and hence say get high speed internet). Rather than have everyone in the town install a six foot dish they install a single dish and then retransmit the signal around the town – and that way everyone in the remote area can use the signal cheaply. Seems sensible enough.

But in the eyes of Falcone this gives him the right to use 40 thousand plus booster stations all they way across America so he can retransmit to everyone. Of course these booster stations will also be connected to ground-based fibre networks where appropriate. And so Falcone plans to build another US national cell phone network or at least to sell spectrum to the existing networks.

This is – to put it mildly – audacious. And there is little doubt that American consumers would benefit from more wireless spectrum capacity.

But also to put it mildly it is a massive lean on the American taxpayer. You see if the spectrum had been auctioned like traditional spectrum the taxpayer would have received billions of dollars – dollars that will might now flow to Lightsquared and Falcone. Rarely have I seen taxpayers give away larger gifts to corporates (and that includes the banks) but in this case they are giving the gift to one slightly compromised billionaire and his hedge-fund clients. It is really hard – nay impossible – to see any policy basis for that gift.

But the FCC (the relevant regulator) rolled over and granted Falcone permission. McLean points out the political donations involved (they were large my the standards of most people, but tiny when billions of dollars are on the line). Falcone also hired the husband of a key FCC staffer to be a lobbyist. I shouldn't be surprised – this is they way some billionaires make money in the US. But the regulatory birth of Lightsquared will cast a stain across its future and its financing – a stain that I hope Falcone can't avoid.

The first stain is possible interference between Lightsquared's terrestrial network and GPS. There is not much spectral distance between Lightsquared and much GPS signal – but GPS signal is weak (it comes from satellites) and Lightsquared will be much stronger (it is domestic and it needs to carry lots of information). That means that Lightsquared will potentially interfere with GPS networks. Serious people including the defence department object to Falcone's use of the spectrum. Falcone – quoted in McLean's articles – accuses the critics of making up the GPS objection to protect their privileged domestic spectrum positions. Two responses: those critics include the defence department and clearly Falcone is stretching it there, secondly the other critics paid good money to taxpayers for their privileged spectrum position – Falcone relied on a loophole.]

But the GPS stain is not going away. I don't know whether the spectrum interference is terminal or not – but the loophole-political-donation issue raises makes it more believable. After all this spectrum was not allocated according to standard international practice.

And the stain is going to make it really hard for Falcone to finance the use of this spectrum. After all if the network interferes with GPS that will make it less useful. After some pilot too trained to use his GPS gets his signal jammed and crashes a plane Falcone will find it much harder to maintain his ill-gotten spectrum position. Money lent against Lightsquared might be lost because the underlying spectrum ownership is ephemeral.

Carl Icahn it seems has been buying Lightsquared's debt. That will be a fantastic investment if Lightsquared can get past the stain of its birth. But I doubt it.

Anyway I hope this post contributes to the end-failure of Lightsquared. Dirty or incompetent regulators make bad capitalism. If Falcone had obtained the spectrum the usual way, paying the usual number of billion dollars and dealing with interference issues (like GPS) in an open and transparent manner I would have no problems. As it is Falcone sickens me and Grassley is right on the money.

Dear Mr Falcone....

As a manager of a small hedge-fund to one of the leaders in my industry: I will respect you again when you make your next entirely straight billion dollars.

It is not this one.



John

Mr Fred allows me a victory lap...

Sir Fred was not a good man -
He had his little ways.
And sometimes no one spoke to him
For days and days and days.
And men who came across him,
When walking in the town,
Gave him a supercilious stare,
Or passed with noses in the air -
And bad Sir Fred stood dumbly there,
Blushing beneath his frown.

Sir Fred was not a good man,
And no good friends had he.
He stayed in every afternoon ...
But no one came to tea.
And, round about December,
The cards upon his shelf
Which wished him lots of Christmas cheer,
And fortune for the coming year,
Were never from his near and dear,
But only from himself.

(Apologies to AAMilne...)

Some links:

The fourth post ever on this blog in which I say Sir Fred Goodwin should be sacked for cause and denied his retirement benefits. I argue he is (now was) the worst CEO of any major bank anywhere.


And the end game as reported by FTAlphaville: Introducing Mr Fred Goodwin - Former Knights of the Bachelor...



John

Does my butt look fat in this?

Kid Dynamite summed up the case for lululemon athletica inc (always spelled in fashionable lower case) very simply. His sister, and presumably many other women, thought the clothes make their butt look good. I gather this is not original - Howard Lindzon has also turned a few choice phrases in bullish promotion of the stock.

I thought this was crass - but for the life of me I can't think of any better explanation for the stock price.

Background

lululemon athletica it is a remarkable company. The website describes the product (in lower case) as "yoga clothes and running gear for sweaty workouts" and it sells its products in the three fattest nations in the world (USA, Australia and Canada). You would think a specialist yoga and running clothes retailer in those markets would be playing to a limited audience.

But if you thought that you would be wrong.

lulu had sales of $629 million for the nine months ended October 30. This was up about 35 percent from last year. This is a retailer so the fourth quarter matters. Last year they did 245 million in sales in that quarter and this year (at a guess) it will be 35 percent higher - say 331 million. Annual sales will be somewhat shy of a billion dollars.

A billion dollars in sales is a lot of "yoga clothes and running gear for sweaty workouts". Nike by contrast does just over 20 billion in sales but shoes are a much bigger category - and their market is seemingly much wider. After all Nike also makes shoes for yoga and running (and my guess is the shoes should command more gross dollars of margin than the leotards).

Scale and stock price

A billion dollars in sales is huge for such a narrow category. But even that is small compared to lulu's stock price. You see lulu market cap is now almost $10 billion. The stock is priced at 10 times sales. That is amazing for a fashion company. Nike by comparison has a market cap of $46 billion and a price to sales ratio of just over 2. And Nike is not a thin margin business. No other clothing company comes close.

Here is a chart of Apple's price to sales ratio:

Apple spent most the time at about 1 to 3 times sales (currently just over 3) and never exceeded 7 times sales.

Apple was never as richly valued as lulu lemon athletica.

So I want to play the valuation guessing game.

*  What is the value of the end market for yoga and running clothes. Is it $5 billion per year at which point lulu will be priced like Nike or is it larger or smaller?
*  Can you explain the stock price in any terms other than a play on female vanity? Is Kid Dynamite's explanation of the brand appeal and the stock right?
*  Even as a play on female vanity is it overpriced?
*  What if anything keeps the competition out of yoga clothes?

I would really like to know what any of the big institutional holders are thinking. Maybe their butt looks fantastic but their brain looks a little suspect.

I have no position. Shorting female vanity is not something I have ever done successfully - and I sure as hell would not want to be long this. Besides the entire "it is overpriced" argument applied 50 percent down from here.




John