In praise of Frank Lowy

Wayne Swan the Treasurer of Australia (in UK parlance the Chancellor of the Exchequer, in US parlance the Secretary of the Treasury) has been publicly criticizing the new Australian billionaires and their political influence warning that they are a risk to the Australian ethos of the "fair go".

He is quoted as follows:

"A handful of vested interests that have pocketed a disproportionate share of the nation's economic success now feel they have a right to shape Australia's future to satisfy their own self-interest."

Swan's critics have accused him of "class warfare".

This will be highly familiar to American readers who have got used to living in a world where lots of money gives you better access to speech. I have barely met an American who disagrees with this sentiment but mainly when the said pile of money disagrees with them.

To liberals in America the Koch brothers are evil incarnate.

Several conservatives think the same thing about Warren Buffett when he argues the rich should pay more tax. Governor Christie's comments were just plain angry. George Soros induces apoplexy in some conservatives.

And most Americans think there is something unseemly about K-Street and the influence peddling lobbyists of Capital Hill.

Money politics - American style - is settling in in Australia. Wayne Swan knows it.

But in Australia it is potentially much more dangerous than in America. Our new-era Australian billionaires - the ones Wayne Swan rails against - are all billionaires from resource extraction. They all get their money by digging up things that potentially belong to all Australians and selling them to foreigners. And they railed against the resource rent tax (a tax whereby the rest of us got paid something for their bounty). As well they might. And they rail against carbon trading schemes.

Indeed American style money politics in Australia is far more insidious than in the US because our billionaires are far less diverse. A diversity in billionaires (and in the way they make their money) gives us a diversity of billionaire opinion. You can get the Koch Brothers and George Soros in one system - and to some extent their opinions (and the money with which they foist them onto the rest of us) offset each other. The balance is preserved.

Here we risk no balance. And so I am writing a post to tell you just how important Frank Lowy has become. Frank is an opinionated billionaire who made his money from property management and shopping centres. He is "Mr Westfield". He is also highly opinionated and funds his own think-tank (the Lowy Institute). I have in the past disagreed with him strongly - but at the moment I am just darn pleased that he is there.

Lowy is fighting with Clive Palmer (a resources billionaire) about of all billionaire disputes - the business of owning football teams. But I hope that is just the start of it. He is our most opinionated non-resource billionaire, one with a global perspective - and suddenly he is part of the future of Australian democracy.

Frank Lowy (despite the high quality think-tank) has never shown the intellectual depth and breadth of vision of George Soros. I am just as familiar with his influence on local councils (getting his projects approved and his competitor projects rejected) than I am with his global vision. But Frank is all we have got. Billionaire visions are pretty thin around here.

I never thought I would say this. Frank Lowy - your country needs you.




John

PS. I am a hedge fund manager. My job is to find rich people, invest their money and make them richer. The rise of an Australian plutocracy is thus in my interests but I would prefer a plurality of plutocrat clients.

When your tool fails your stock drops 35 percent

Houston American Energy yesterday announced a problematic exploration well. They had (drilling) tool failure. The stock fell 35 percent.

I read a lot of press releases: this one is amusing.

HOUSTON, March 1, 2012 /PRNewswire/ -- As reported in Houston American Energy Corp's (NYSE Amex: HUSA) Quarterly Report on Form 10-Q for the quarter ended September 30, 2011 and in Form 8-K on December 19, 2011, drilling operations on the Company's first well on the CPO-4 block in Colombia, the Tamandua #1, with a projected target depth of 16,300 feet, commenced in July 2011 and was subsequently sidetracked to address drilling issues associated with high pressure and inflows of hydrocarbons and fluids into the well bore. As of December 19, 2011, the sidetrack well had been drilled to 13,989 feet and efforts were ongoing to control the well bore while continuing drilling to the target depth.  

Subsequently, and as of March 1, 2012, the Tamandua #1 sidetrack well had a 7 inch liner run to 13,913 feet and was drilled to total depth ("TD") at 15,562 feet.   Upon drilling the well to TD, the well encountered Paleozoics which was a clear indication that the TD had been reached.    

While the well exhibited oil shows while drilling, and other indications of hydrocarbons such as log analysis that indicate possible productive sands, hole conditions have prohibited sufficient testing on the bottom hole sections.  There have been many attempts to evaluate the well resulting in tool failures and stuck pipe, and current conditions are such that the operator has made the decision not to try to reenter the bottom hole sections.  As a result of these developments, the decision has been made that without the ability to effectively test the lower zones, the most prudent course of action is to plug back the well and to further evaluate the C-7 and C-9 Formations.  As previously reported and indicated by the Logging While Drilling data, the well encountered approximately 200 feet of net resistive sands in the C-7 formation and approximately 140 feet of net resistive sands in the C-9 formation (resistive sands do not necessarily mean pay).  

Results of the further evaluation of the C-7 and C-9 formations will be announced as soon as they are available.  After attempting to complete the well, the rig is expected to be moved to one of two locations that are currently permitted and ready to receive the rig.  In addition, the Operator has five additional locations that are in various stages of permitting, location and construction. 

John

And a follow up question: can anyone explain to me what is meant by "net resistive sands"? The phrase does not appear anywhere in the Google database not linked to this company.

Post script: There is a Bloomberg article which quotes the CEO as follows:

“I would like to make it clear to our investors that the Tamandua #1 well is not being abandoned,” John F. Terwilliger, chief executive officer of Houston American, said in an e-mailed statement today. 

“Current ongoing operations are to make a completion attempt in the C-9 and C-7 sands,” he said. “As previously reported, the Tamandua #1 well exhibited hydrocarbon shows in the C-7 and C-9 sands, and logged approximately 200 feet of net resistive sands in the C-7 formation and approximately 140 feet of net resistive sands in the C-9 formation. We are eagerly awaiting the results from these completion attempts.”

This corrects a previous article which unambiguously suggested the well was dry.

Why I do not like small cap stocks much at the moment

I run a small hedge fund.

Most people that do that want to use their (lack of) size to find (and exploit) value-priced small cap stocks.

The problem is that almost any company with a market cap of $200 million to $5 billion has teams of private equity (PE) buyers looking at it.

The competition is fierce.

The PE guys have two advantages I do not. They have access to cheap loan funds in quantity. And when they do a transaction they can get inside the company, look at the books and do proper due diligence.

Those are winning advantages - advantages that I would not want to compete against.

One arguable offset to those advantages is that many PE executives are surprisingly inept. They look good in their suits - but I have met a few along the way who really are empty suits. You know the type - straight out of their big-name business schools but without the depth of experience and the humility to know that business can be difficult. For the purposes of investing they are stupid.

Their stupidity however is masked because mistakes are not marked-to-market. A bad transaction can be buried a long time and a few good ones (with lots of leverage) can offset a lot of ills.

I don't understand why so-called "value investors" are drawn to small caps. Trying to find cheap stocks against stupid people backed by seemingly limitless cheap funds and no market discipline does not seem like a good way to construct a value portfolio.

John

When you think you made a great purchase (Warren Buffett edition)

I consider myself a bit of a Buffettphile - but I did not even know Berkshire had a sizeable agricultural machinery operation. Sure agriculture has been good and because the capital equipment is a lean off that it has been very good. But this throw-away quote from the annual letter is astounding:

Vic Mancinelli again set a record at CTB, our agricultural equipment operation. We purchased CTB in 2002 for $139 million. It has subsequently distributed $180 million to Berkshire, last year earned $124 million pre-tax and has $109 million in cash. Vic has made a number of bolt-on acquisitions over the years, including a meaningful one he signed up after year end.

This business has - in a decade - distributed well over 100 percent of its purchase price in cash to Berkshire and its pre-tax earnings are roughly the acquisition price. 

Of the thousands of listed companies in the world how many have been that good in the last decade. Surely not many.

John

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