Weekend edition: Car Dealers

I am a hedge fund manager who trades in marketable securities only. I look at a quote in a market - take it or leave it.

I have developed no negotiating skill - if I don't like the quote I just walk away. If the quote is way too high I short sell it. If it is low I buy.

But mostly I just walk away. It is not rude to walk away. The person on the other side of the trade does not even know who you are. It is not personal. Simply: if the quote is not right I do not want to deal.

If I have to negotiate I will generally leave it to my wife who has more patience whilst people muck around on price. People who want to waste half an hour negotiating to an end point that could be got to in 2 minutes are a waste of time and space.

Further - mostly I short-sell frauds. I find people who are lying (and I am very good at determining when someone is lying). Whey they lie I short-sell their securities. The slogan (mostly true) is once a scumbag always a scumbag. Shortselling scumbags in moderation (always in moderation) is generally a profitable strategy.

And so I come with a general hatred of buying a car.

These days buying a car is a fairly transparent business. They give you a quote off something that looks like a supplier provided list price. You ask them if they can do a better deal and depending on how ambitious they are and how much room to move they have they offer you a "deal".

Then you go home, look up the internet chat boards, see what people have negotiated elsewhere and come back with a price.

We did that - and the price we came back with was about 5 percent below where I figured they were prepared to deal. I told them I had looked at the chat boards and told them that price was lower than I expected and that they should just come back with something realistic.

The told me that they would be losing $4000 at the price I suggested.

I knew that was a lie. They knew I knew it was a lie. I said so and said that I will not deal if they will not be straight with me. They bristled.

I walked out. I don't have the patience to deal with scumbags and liars.

If this were senior management/promoters of a listed security I know what I would do. I would turn around and short-sell them. Liars then are nice because they are profitable for me.

But dealing with scumbag car-dealers makes me feel strangely powerless and angry.

And it leaves me despising car dealers and the companies they represent. I am not even going to mention the brand because I suspect it could be any car brand.

[Still for the rest of my life XXX Brand will be associated with scumbag people and no amount of advertising will fix the image-association.]

Why are people like this?

Here is a question that has puzzled me for a while. I short sell stocks promoted by slime-bag individuals. People who may be rich but you would be horrified if they married your daughter.

There are a surprisingly large number of such people around.

My question was were those people born that way or did 10 years of exposure to other scum-bags on Wall Street turn them into the gebbeths they have become? Understanding the development and career path of scumbag stock promoters will make my job easier. Finding these little piles of pus and short-selling their wares is one of my main career tasks.

But it is hard to track stock promoters. They are a shadowy lot and saying out loud that they are slime doesn't get me very far.

But it is easy to track car dealers - and their sliminess is readily apparent to all. It is not even controversial.

So how did car dealers get this way? Do car dealers actively go out of their way to recruit more scumbags? Or does being a car dealer turn you into a scumbag?

If it is the former how do they find these scumbags so effectively? (As someone who short-sells I want to copy that method!)

If it is the latter how long does it take as a car dealer before the basics of human decency have been stripped from you? How hard is it to corrupt people - to take away their soul?

Just asking.




John

Changing my mind on Microsoft

Seldom have I looked at something that is a major long in the portfolio, changed my mind, sold the entire position and continued selling to go short (albeit in a small way).

I just did that on Microsoft. The immediate trigger was Windows 8 - but the thinking has been longer and harder than that.

This post is to run through my thinking - and maybe generate some comment. (Smart readers - and you are smart readers - are a great testing-board for my theories...)

Quick background to the Microsoft story

The background to Microsoft is well known. In the late 1990s Windows developed huge market power. Whilst not strictly a monopoly the company had plenty of monopoly characteristics. Sure you could buy a Macintosh - but that market was so small that people did not develop software for Macs and hence Macs were for people who did not need a wide range of software. You could also load a computer with Linux (although despite being a sometime-geek I could not imagine doing except for a server). In those days Microsoft even dominated the server market.

This was - for all effective purposes - a growing global monopoly with very low marginal costs producing for what was fast becoming one of the most important industries in the world (personal computers).

Moreover it had huge pricing power. I purchased a computer from Gateway (remember them) and spent about $1200. The $50 operating system was embedded - a small cost embedded in a large cost. I assure you Microsoft made more from the transaction than Gateway. Gateway even ran a store to sell me that beige box - the store ultimately being run for the benefit of Microsoft.

The company had a virtuous circle. People developed software to run on Microsoft using Microsoft developer tools. They did not bother developing for other platforms because those platforms were economically irrelevant and the Microsoft developer tools worked. Because all the software you might want to use ran on Windows you were effectively compelled to run a Windows machine thus perpetuating the cycle.

Microsoft used its power for better and for worse. My personal gripe was how poorly Microsoft thought about and handled security issues. My Linux computer is as far as I know virus free. Apple only had to remove their virus-immune claims recently. Windows security issues are everywhere and it did not need to be so. The first computer virus I ever saw was in 1989 and it was on a Mac - these problems - if not entirely soluble - were controllable. Microsoft did not control them. Whether this was arrogance or incompetence or monopolistic-disinterest I do not know though I have heard arguments for all three propositions.

Still Microsoft gave us acceptable if not brilliant product and I never quite bought the "evil-empire" line. In my view they were a large, increasingly fat, slightly disinterested monopolist that had stopped thinking clearly about users.

Developers: the key to the Microsoft virtuous circle

The key to Microsoft's market power was the virtuous circle whereby people used Microsoft computers because software was developed for Microsoft and people developed software for Microsoft because people used Microsoft computers.

Making all this work required that Microsoft make available easy to use "developer tools". A large developer tools business would include tools for software development and training tools to train future developers. If the developer tool business ran at (say) a billion dollars in loss that was perfectly acceptable so long as more and more software was developed to be Microsoft platform specific.* Indeed the developer tools business never played much of a role in the sector-breakup of Microsoft - but that did not diminish its importance.

If you are not convinced that developers are the key to Microsoft's lock-in look at this classic video of Steve Balmer:




Balmer is sufficiently worked up that the wags captioned this video with the text deodorant, deodorant, deodorant. However the extent to which he is worked up tells the Microsoft crowd what they should be focussed on.

The rise of platform-agnostic developer tools

The Microsoft virtuous circle is now dead. Two related things killed it: the rise of platform agnostic developer tools and the rise of alternative operating systems (Linux for servers, iOS and the "Big Cat" series for Apple, Android).

To my way of thinking the platform-agnostic developer tools came first - though this is a chicken-and-egg problem. The first really important platform-agnostic tool was Java. Programs written in Java run on Linux computers precisely the same way as they run on Apple computers or Microsoft computers. If you developed something on Java you could run it anywhere and you thus undermined the Microsoft virtuous circle.

Developing things for Java became widespread when people downloaded programs (applets really) from the internet. The person writing the applet had no idea what the customer computer set-up was and so had to write in a platform-agnostic fashion. Interactive Brokers for instance writes its software to run on Java - and they do this because it is a complex piece of software that has to run on many different flavours of client computer.

Over time Python developed as an even more important platform agnostic developer tool.

Nowadays nobody under thirty writes anything on Microsoft developer tools unless they are demented or brain-dead. Firstly the kids out of the colleges know the platform agnostic stuff well. Secondly when half the computers leaving factories either run iOS or Android (that is are smart-phones) nobody sensible will write in a way that does not allow easy porting to these platforms.

Microsoft's developer tools business and the customer lock it created has had a bullet through the brain. The body is lying on the floor - and most the users who have never developed anything and did not know that there even was a developers tool business have not noticed the blood-soaked victim.

The lock that Steve Balmer worked himself into a frenzied sweat over is dead.

The lock is dead: long live the lock

An asset management firm I know well has 100 thousand or so customers. The customer relations system for the firm is proprietary. They developed it themselves and it integrates with their business practice.

And it runs on Microsoft. It was developed by people who are now over 35 - and hence used Microsoft developer tools.

This firm is very progressive with their computing structure. All internal computer now run as virtual machines (not desktops) running on two mondo-powerful Linux servers. The virtualization platform is Citrix. Nobody has a functional box under their desk any more.

However on top of this enterprise cloud is 65 virtual Microsoft machines all running Windows. The company has got rid of the desktop computers entirely (sorry Dell and HP), it has a hugely powerful internal network system (currently provided by Cisco but in the future provided probably provided by Nicira). Disaster recovery is a mirror of the two mondo-powerful servers 100km away.

In other words this is the enterprise computing platform of the future.

But they still use Microsoft as if they had the computing platform of 1999.

Why?

Because they used the developer tools of 1999 to build mission-critical enterprise software.

Nobody is locking new stuff up in Microsoft but there is huge amounts of intellectual capital built up in Microsoft's old platform and that intellectual capital continues to force people to use Microsoft. Some of this property is trivial (I know to shut down the computer I go to the "start" button). But things like the front end for a customer relations system for a largish financial firm - that is non-trivial and it is very sticky.

Why I owned Microsoft

When I purchased Microsoft I was well aware of the death of the lock (developer tools). I knew the future for Microsoft would not (unless they were very lucky and well managed) be anything like as glorious as the past - but there were two really decent trends in favour of Microsoft.

Firstly as enterprises moved their computing platforms to enterprise clouds the Microsoft computers - rented as virtual computers - would be pervasive. Microsoft was going to be able to charge rents for a long time. People would upgrade their computer (meaning the physical hardware running linux and Citrix or VMWare on top of that) but they would still pay rent to Microsoft.

Moreover these Microsoft dead-enders - locked in by the enterprise software that they wrote a long time ago - are very sticky. It is expensive to redevelop proprietary systems - and so they were likely to use Microsoft for decades. The pricing would be to lease seats to virtual computers and those lease fees could be high and increasing.

Second, there was one beautiful tailwind for Microsoft which has alas disappeared. In 1999 if you purchased a computer it was probably a beige box. (Laptops were prohibitively expensive and underpowered.) If you purchased a computer in India it was a beige box it came loaded with a hot (ie pirated) version of Microsoft.

By 2007 if you purchased a computer it was likely a laptop. Boxes have become objects for gaming enthusiasts, developers and dinosaurs (I say this as the proud owner of a couple of boxes). The computing power you need can (mostly) be put in a smaller package at a reasonable cost. It is almost impossible to buy a laptop which is not pre-loaded with an authentic version of Microsoft. That was true in India too. I do not even use Microsoft but if I buy a Lenovo computer in Australia on their website I am forced to include a copy of Windows. The tailwind de-jour was the rise of computing in developing countries and most importantly the shift to laptops reducing piracy to almost zero. This was profoundly nice to Microsoft - but as a trend it is dead. The new generation of computers is going to be pads - they may have plug in keyboards - but they are pads. Even laptop sales are problematic.

Moreover laptop prices are falling and falling. Five hundred dollars now buys quite a nice laptop. The laptop I use day-to-day is not worth much more than that (except for add-ons like a large solid state hard drive). Microsoft once buried $50-80 of software in a $2000 computer and that made their (fat and profitable) take disappear. It is much harder to bury $50 of software in a $300 computer - but that is where we are going.

But in essence we had two trends: pricing power on dinosaur enterprise computing driven by the old customer lock (previously developed enterprise software). That pricing power would remain and turn into rental contracts as computers disappeared into enterprise clouds. And we had developed world laptops (a trend that is now turned quite sour).

A Vision of Windows 8

I had a vision of Windows 8 which addressed all of this - and I doubt that it was a vision that was very far from Microsoft's own vision.

Windows 8 was to serve a dual purpose. It was to be above all a pad operating system - one that doubled as a desktop operating system. You were going to be presented with bunch of tiles - the functional equivalent of Apple's app icons. If you used it as a pad it would have the limited functionality of a pad.

However you could take the pad, put it on a docking stand and use it with a keyboard and mouse as a desktop computer. This solves a lot of problems.

(a) it offers a distinct improvement over existing pads which are not very good for content creation. I cannot see myself editing a video on a pad or writing a blog post this long. But hey - I could with a plug-in-keyboard and mouse,

(b) it offers enterprises a chance to take their existing enterprise software and make it mobile. For example if a customer relationship system runs on Windows you could - without much further development - make it run on a Windows pad. This means there would be no incentive to redevelop it using (say) Python to run on iOS.

(c) it gets a large number of people used to the Windows system. There is a lot of human capital developed in using computer systems - trying to change - even Windows to Mac or vice-versa costs a lot of time as you work out how to say copy a file to an external hard drive or from a camera.

(d) it leads you to a world where the pad has some computing power - but if you need more grunt you connect it to a docking station in turn connected to a fast internet connection and you put the power in a cloud and rent the power out by usage. A world of semi-smart terminals - a pad if not docked, a super-computer if docked.

But the combined desktop interface has a big problem. Because desktops and pads and phones do different things they have different interfaces. A windows, icons, mouse and pull down menu interface has a venerable history because it works.

The Ubuntu Unity failure


Microsoft is not the only party that sees a convergence of pads and computers. Ubuntu - by far the leading attempt to make a workable Linux desktop for a very large market - did a complete revamp of their desktop changing from a Windows type interface (Gnome 2) to a Mac/pad type interface (Unity). They had large, immovable buttons - just right to use with fingers. Pull down menus were dramatically reduced in frequency and importance.

This transition was a mess. Utterly horrible. You are not convinced: google the phrase unity sucks.

However - and this is fair - Linux desktop users (we are a small tribe) are probably the most motivated to learn new systems of any group on the planet. Moreover Unity did get better through time.

Apple also knows that combining the interface is very difficult. That is why they have never taken their Mac interface and put it on a pad or vice versa.

You could have worked out the difficulty just by trying to use Unity (but I doubt too many people in the Microsoft development team tried that trick - because it is Linux and not developed there).

I told the whole sorry Unity story to a senior former Microsoft employee and he thought they would not be so stupid to try the combined desktop. He thought that the interface would change dramatically when the computer was docked - looking more like Windows 7 (a good system) when docked and more like a Windows phone (also an adequate system) when mobile.

What Microsoft has done

Microsoft have tried what I originally thought impossible or at least stupid. They did not change the interface of Windows 8 much to deal with the different ways you communicate with that interface. (Fingers versus keyboard and mouse for instance.)

Here is the video which had me selling my Microsoft stake. Its a computer reviewer filming his dad trying to use Windows 8.




I watched this and the pain of problem recognition came over me.  This was exactly how I felt when I first used Ubuntu Unity.

This was a predictable problem. It is a problem that every user of Ubuntu suffered through. This is a management stuff up of the first order.

What Microsoft has done to its business

Firstly Microsoft has not understood its real franchise. Its real franchise is computers on which people do work. They don't play. They write stuff. They enter data. They manipulate graphs. They might even edit a video.

These computers are tools and the operating system is just the air they breathe. On a day to day basis they don't think about the operating system - they only think about it when it changes.

What they should have done is kept something close to a Windows 7 interface when the computer is docked and something close to a pad interface when the computer is mobile. Instead they forced people to relate to a pad interface via a keyboard. They assumed their users were as motivated as (say) Ubuntu users - whereas most their users don't give a fig about learning a new system. Changes to a proven interface either have to be incremental (so you bring your audience along with you) or so self explanatory that the audience learns in 20 minutes (thank you Apple). Windows 8 is neither.

Prediction: this will wind up with a lower corporate take up rate than Vista (ie next to none).

Prediction 2: this will accelerate, rather than slow down, the rate at which enterprises take their enterprise specific software into platform independent programs

Prediction 3: by stuffing this up Microsoft has just about lost its bet on moving the retail computer market into docking cloud computers. Apple will do this. And they will do it by stealth.

Apple, the forthcoming death of the Mac Pro and cloud computing

Bob Cringely laid out Apple's plans a while ago - commenting on all things the lack of an upgrade of the motherboard of a Mac Pro during the latest round of Apple upgrades. The Mac Pro is the most powerful Mac and the only Mac on which users can add their own components through expansion slots.

Being the most powerful Mac it is beloved by power users. The definitive power users are people like video editors. These people want to download huge amounts of data to their (expandable) machine and hence like the fastest download protocols. The fastest current USB protocol - used for say getting material from high definition camcorders - is USB3. You would think that USB3 would be standard in a Mac Pro.

But the motherboard does not have it despite USB3 being a few years old.

And when they did not upgrade the Mac Pro to USB3 Cringely rightly asked what Apple would do about their power users. Here was his conclusion:

Apple will eventually have to explain to those folks [power users] how less is more and how this new world [no expandable computers] is even better for them. I think I know how Apple will do it. 

When the Mac Pro dies for good Apple will replace it in the market with a combination of Thunderbolt-linked Mac Mini computing bricks backed up by rented cloud processing, all driven from an iMac or MacBook workstation. 

I just wonder when they’ll get around to telling us?

Apple's balance sheet is consistent with this vision. Apple has been developing huge cloud computing facilities evidenced by the vast expansion of property, plant and equipment in their balance sheet (which has been piling this stuff on in the billions).

Windows 8 - a product that gets people used to and software developed for a pad that docks - was Microsoft's way of getting used to the idea of portable computers with rented super-computer cloud space.


And it will be a failure because Microsoft, not for the first time, have lost their view of real users.

I held Microsoft for 18 months (and it was not a bad investment). But last night I gave up.

For comment.



John


*There are other lock-ins at Microsoft - for instance my business partner irregularly writes Visual Basic algorithms for spreadsheets. Visual Basic is Microsoft proprietary and these spreadsheets lock us into having at least one Microsoft machine in the office. I complain regularly about this - but Simon is over 40 and teaching old-dogs new tricks is hard. He has a lot of human capital invested in his ability to crank out something in Visual Basic.

Italy, Portugal, Greece, Spain, Australia: Some comments on Vodafone's rusults

Here is an extraordinary slide of revenue by jurisdiction from the last Vodafone conference call...

Revenue is great in growing emerging markets (Turkey has become a land of smartphones). Revenue is bad in Italy, Portugal, Greece and Spain. The biggest driver there is mobile termination rates - these are markets where you pay to make a call to a mobile phone and these calls are discretionary.

The shocker though is Australia - and it has been a shocker for a while. Revenue performance in Australia is worse than any Southern European country.

This was entirely predictable.

In Australia Three ("3") merged with Vodafone and network performance was abysmal. This video went up on YouTube a little over a year ago parodying the (combined) company.




That video has roughly 200 thousand views - or 1 percent of the Australian population. These companies spent a lot of money on advertising and sports sponsorship: all wasted because of high credibility parodies and word of mouth. The results speak for themselves as this press article demonstrates:

Hutchison Telecoms Australia, 50 per cent stakeholder in Vodafone Hutchison Australia (VHA), announced yesterday afternoon that VHA lost 178,000 customers and reported a loss of AU$260.2 million for the first six month of 2012. 

In what has been a disastrous 18 months for the company, following its infamous network outages in 2011, Vodafone's customer base slid below 7 million to 6.8 million, from a high of 7.5 million in 2010.

Note the scale of this stuff-up. The population of Australia is 22.6 million and there are roughly the same number of mobile phones. They lost 700 thousand customers or three percent of the population. [This is in a business where a one percent movement is a big change in share...]

My guess, in terms of lost customers and future profits the stuff up will wind up being worth something like a billion dollars.

And it takes a special customer-service incompetence to get this bad. One disgruntled customer who wanted to be let out of their contract because the service did not work wound up setting up a website (vodafail.com) to let customers grieve. Eventually Vodafail did let the victim out of their contract - but when it takes a successful social media campaign to get the company to do the right thing there is something deeply wrong with management. [Vodafail did not meet its part of the obligation - it did not deliver a phone service...]

The #vodafail tag is still active in Twitter as the following shows:

Yes - the company still converts iPhones to iPods and can take half an hour to update twitter. This problem is not yet solved.

But to be fair it is nowhere near as bad as during 2011 - and the frequency of tweets with the #vodafail tag is declining. Moreover the Vodafail website has gone (relatively) quiet noting that:

More recently, traffic to Vodafail.com has declined significantly. Having achieved the goal of raising awareness and promoting concrete action in early 2011, we have now reached the point of closing Vodafail to new complaints. The site will remain online for as long as possible as a reminder and an example of what is possible when we share our experiences. 

This was an execution stuff-up of the first order. And it took until March 2012 for them to parachute in a new CEO (Bill Morrow) who has (rightly) declared that his task is network, network, network and network...

But he also has to get back trust - especially in a business that asks people to sign 24 month contracts and then won't let them out when they can't meet their end of the contract (their end being to make your phone work). He has made a start - allowing a 30 day let-out clause: Here are the terms:

The new Vodafone network - rolling out now

We're confident you'll be happy with our new network, so now we guarantee it.

Upgrade on a new Postpaid Mobile or Mobile Broadband Modem service and if you're not happy with your network experience you can cancel your contract within the first 30 days. No cancellation fees, just pay for what you've used, until cancellation is finalised¹.

We're investing $1 billion on rolling out a new Vodafone network to give you:

• Stronger signals
• Faster downloads
• Better indoor coverage

Than ever before from Vodafone. Find out more Vodafone.com.au/network 

Trust is a special thing in business. Once it is gone I don't know how much cricket you need to sponsor to get it back.

I don't envy Bill Morrow his job. And I wonder why it took 12 months after Vodafail was the but of musical parody to actually change the CEO. Surely there are enough network-technical-junkies in Vodafone who would like a 6 months emergency working gig in Australia to get the network fixed up.

The whole thing petrifies me because I own Vodafone stock (despite this problem) and they are doing a much bigger integration in the UK where they are merging with Cable and Wireless. Stuffing that one up would matter much more than my little local market.

Oh for the old days of stock picking

All of this makes me pine for the old days of stock picking. Vodafone (as a stock) is currently driven by two things:

(a) the terms on which it can extract value from its 45 percent stake in Verizon Wireless, and

(b) the value/profit proposition of their (strained) European mobile networks business.

The first is a corporate governance concern, the second a macroeconomics concern.

Australia - a pea-sized market at the edge of the world - is entirely driven by competitive positioning (once good, now less good) and execution (which has been abysmal).

In the old days stock picking was a matter of understanding competitive dynamics and business execution. If you bought a stock at a mid-teens multiple where the competitive dynamic did not deteriorate and the management executed you did fine. If you paid 12 times you did well. If you paid 9 times you made-out-like-a-bandit.

These days I spend much of my time considering whether macroeconomics can make a company blow up (macro concerns) or whether the management is going to steal from me (governance concerns).

Vodafone Australia and its problems remind me of the pitfalls of yesteryear's stock picking. Whether that world is more fun or less fun I will leave to readers imagination - but the outcomes were generally more palatable for the wider public.



John

I had an incredibly precise dream...

Moore's Law collapsed. Had all sorts of investment implications. I woke up startled...


John

Supervalu and the Wayne Gretzky school of value investing

I once wrote a blog post stating why I did not much like small caps. The comments (and there were many) wound up in a discussion of the seemingly cheap grocer Supervalu. This owns Albertsons and others.

I wrote a separate blog post on it - which further explained why I did not like it. The answer came down to thinking about what the business might look like in five years time. Wayne Gretzky liked to skate to where the puck was going to be. Investors should invest likewise - on how the business might look in three to five years time.

We are five months on. The company has suspended dividends and is aggressively cutting price in its shops. They are also having a major review of costs. To quote:

“Given the economic situation the American consumer is in, a lot of grocery competitors are focused on making sure they have the right value proposition for customers. We needed to accelerate our ability to play in that game.”

When your best strategy is getting into a price-war with Walmart the Wayne Gretzky question answers itself.




John

Disclosure: as explained in the original blog post I have no position in this stock, something I now regret.

Weekend edition: Australian pop stars twenty years later

Someone who was a modestly successful pop star (a number 1 or two and a dozen other chartings) can make a living off old glories for most their life in America. The market is sufficiently big.

But someone of that status has a much harder time making ends meet in music in Australia. You can be privileged to see them with very small (and in this case respectful) audiences.

Below is one of my favourites from my 20s - Angie Hart - who is somewhat younger than me - and was one of the first Australian stars to sing in a really strong Australian accent.



The song is Elvis Costello's (similarly dated) song Shipbuilding - a story about laid-off ship builders in the North of England looking at the loss of tonnage in the Falklands War and thinking they may get a job at the shipyards. "Within weeks they will be reopening the shipyards, and notifying the next of kin". (If you do not know the lyrics they are reproduced at the end of this post.)

When I was in my 20s I was not very conscious of Angie's Australian accent (and I had one this intense). 10 years of talking on phones internationally and listening to Americans in particular has changed the way I speak. I still sound Australian - but not like that.

Here - 20 something years ago - is the song for which Angie Hart is most famous - another cover - this time of a New Order song...



But what I find really strange is that 20 years later the Frente cover of the New Order song has become the way to do it - especially in Asia where it was featured on Indonesian Idol (no not kidding).

And all over YouTube you find Chinese teenage girls in Malaysia or the Philippines or Indonesia or even China singing New Order songs with a deliberate Australian accent. Here is one - there are hundreds of others.

Fame on the internet can be very strange.




John


Shipbuilding

Is it worth it
A new winter coat and shoes for the wife
And a bicycle on the boys birthday
Its just a rumour that was spread around town
By the women and children
Soon well be shipbuilding
Well I ask you
The boy said dad they're going to take me to task
But I'll be back by christmas
Its just a rumour that was spread around town
Somebody said that someone got filled in
For saying that people get killed in
The result of this shipbuilding
With all the will in the world
Diving for dear life
When we could be diving for pearls
Its just a rumour that was spread around town
A telegram or a picture postcard
Within weeks they'll be re-opening the shipyards
And notifying the next of kin
Once again
Its all were skilled in
We will be shipbuilding
With all the will in the world
Diving for dear life
When we could be diving for pearls
[ Lyrics from: http://www.lyricsfreak.com/e/elvis

Central bankers opposed to functioning markets

As I outlined in the kleptocracy post Chinese households save an absurdly large proportion of their income in bank deposits with regulated interest rates earning about 1 percent nominal.

This is an observable fact. The reasons for it (I blamed the One Child Policy and deliberate financial oppression) are less observable - but the fact of these enormous savings is not in doubt.

Inflation is also highly observable in China. Whether you believe the official statistics or not does not matter. Inflation causes observable political disturbance and many companies are complaining about cost pressure.

There is no doubt that inflation rates in China have been above the regulated bank interest rate and that situation has been persistent.

Simple observable fact: one of the biggest savings pools in the world and possibly the largest incremental savings pool in the world (Chinese middle and lower classes) have saved (and are clearly prepared to save) at observable and high negative real interest rates.

My speculation: if there were full capital mobility the market clearing real interest rate for riskless assets globally would be negative because of that large pool of savers prepared to save at negative real rates.  

If this is true then we should not be at all surprised by gilts in the UK at 1.5 percent and inflation at 3 percent. There is no reason at all to think the market clearing real interest rate has to be positive - indeed given the nature of the incremental savings pool in the world there is a reason to think the reverse. Indeed it is just an extension of what Bernanke observed when he talked about an excess of global savings...

Unfortunately you cannot produce negative real returns on riskless assets unless you allow some inflation.

Central bankers however do not see it that way. Mario Draghi (European Central Bank) still thinks inflation is an ill to be avoided - rather than necessary for market clearance. Mario Draghi is anti-market - and anti-market clearing. He is not the only offender.


I have a follow up post to begin to explore investment and social implications.

For comment.



John

Duties morality and short-selling: Part 2

Almost everyone said that I should tell the old man in the last post that he had lost his life fortune and that his advisor was a crook.

Only one person suggested I watch reruns of the Godfather for advice.

Does it change your mind if the crooked advisor is mafia?

What if there is only a 5 percent chance of him being mafia?

What if you plain do not know?







John

Disclosure: a journalist is going to do it for me - or at least sound the victim out. Seems safer that way. At least for me.

Duties, morality and short selling

I am involved in a short that has mostly collapsed. Take it as read that the company and its accounts were almost entirely fraudulent.

The stock however squeezed a fair bit along the way. Had you "played" the stock you could have made considerable money. But you had to understand that when it spiked it was a short-squeeze and short-squeezes are made to be sold.

The short squeeze happened when an elderly man who was rich from a successful mid-sized business started buying the stock aggressively. He purchased over 10 percent of the company - and more than 20 percent of the float. His purchases were well in excess of 10 million dollars - and on market value now he would be down $8-9 million (having been up considerably along the way).

Given this was a fairly easily determined fraud there was a large short interest - and some of those shorts were so big in the stock they had to buy back as the stock went up (short positions alas get larger as they go against you). So the shorts lost some. Short squeezes do that.

The old man lost, and some short sellers lost. Almost all the longs lost too. The only winners were a few short sellers with positions small enough to sit out the squeeze (which fortunately in this case includes Bronte), a few "players", and of course the insiders. Fidelity was a big loser losing tens of millions of dollars.

The insiders were crooks who sold stock more or less continuously. The insiders carved out something like 40 million of neat profit. All fraudulently obtained. Victims included the old man and Fidelity.

I did a fair amount of research into this elderly man. He wasn't usually a big-swinging stock player - instead he was an investor who had been successful in his normal line of business (a form of retailing) and took his (excessive) confidence into the stock market. Much worse though - he was being privately advised by someone who had previously accepted a ban from the securities industry for selling pump-and-dump securities to his own clients. The old man was being advised by a crooked advisor.

However only recently - and after the old man had lost most of his life savings - did I work out the advisor was a crook. Telling the old man now will just deepen his sadness. On paper he has $1-2 million worth of the shares left - but they are not saleable. If he tried to sell them the stock price would collapse to below a penny. He could - if lucky - get out 50 thousand dollars on the way down.

I know what it is in my interest to do. That is follow the crooked advisor to his next victim and short that stock too.

But I don't know what it is my moral duty to do. Do I tell the old man he has been had (and risk retribution from the advisor)? Do I hope he can salvage the last 50 thousand dollars from what was his 10 million plus dollar life savings? I told the regulators but nothing much has been done. (They don't tend to follow leads like that from short sellers. They perceive we have an interest in telling stories.)

I have now more or less covered the stock. I do not have any particular interest in future moves in this security which already trades well below $1.

Should I ring the old man? Would you?



John

Coronado Biosciences is not exactly kosher

Crohn's disease is an autoimmune bowel disease (or maybe just an immune deficiency) which has symptoms ranging from abdominal pain to diarrhoea and other unpleasantness. It is a disease that I associate with Orthodox Jews of European - particularly German origin and I always thought of as an inherited genetic disease prevalent most strongly amongst Orthodox Jews.* Wikipedia says that it is more common amongst Ashkenazi Jews but they also suggest wider incidence (which somewhat upsets my story). Perhaps my preconception that it is a disease more prevalent among Orthodox Jews in New York probably has as much to do with the original description (at Mt Sinai Hospital).

Coronado Biosciences - now listed on the Nasdaq - is researching a treatment for Crohn's (and possibly a few other autoimmune diseases including the big-daddy of them MS). The technology is all licensed. To quote the original prospectus:

All of our product candidates were in-licensed from third parties. Under the terms of our license agreements, the licensors generally have the right to terminate such agreement in the event of a material breach by us. Our licenses require us to make annual and milestone payments prior to commercialization of any product and our ability to make these payments depends on our ability to generate cash in the future. These agreements generally require us to use diligent and reasonable efforts to develop and commercialize the product candidate. In the case of CNDO-201, the company from which we sublicense CNDO-201, OvaMed, licenses CNDO-201 from a third party, UIRF, in exchange for annual and milestone payments, patent cost reimbursement, royalties based on sales and diligence obligations. Our rights to CNDO-201 are, therefore, also subject to OvaMed’s performance of its obligations to UIRF, certain of which are outside of our control. For example, upon our acquisition of this license from Asphelia, we paid certain overdue patent cost reimbursement obligations to UIRF.   

So the stock holders (those that participated in the recent capital raise) get to fund the development of someone else's drug and have to make milestone payments based on the success of that development.

I will leave it to readers to work out the nuances of that disclosure.

I am more interested in the treatment. Here is how it is described in their latest prospectus:

TSO, or CNDO-201, is a biologic comprising Trichuris suis ova, the microscopic eggs of the porcine whipworm, for the treatment of autoimmune diseases, such as Crohn’s disease, or Crohn’s, ulcerative colitis, or UC, and multiple sclerosis, or MS.

The treatment comes from porcine whipworm - that is a worm that lives in pig intestines.

That is an obscure ingredient. You would think they breed pigs for it - but no a subcontractor of OvaMed breeds the pigs and CNDO pays OvaMed for that. This is the same OvaMed they are licensing the drug from. Here is the disclosure:

We have contracted with OvaMed to produce and supply us with all of our requirements of TSO. OvaMed’s contractor inoculates young pathogen-free pigs with T. suis from a master ova bank and harvests the ova which are incubated to maturity and are processed to remove any viruses and other pathogens. Ova then are processed and extensively tested to assure uniformity. They are then used to repopulate the master ova bank and are processed further by OvaMed into a final formulation of the drug product that is a clear, tasteless and odorless liquid. OvaMed manufacturing is conducted at one facility in Germany.

This disclosure leaves out the really funny detail. Here it is:

Mature T. suis produce ova that exit the porcine host with the stool, however, ova are not infective until incubating in the soil for several weeks, thereby preventing direct host-to-host transmission.

So get this - Coronado Biosciences is a company testing a drug to treat a disease prevalent amongst New York Orthodox Jews where the drug is extracted from pig stools.

And you get the messy relationship with OvaMed thrown in for free.


It is not exactly Kosher.


Either this does not work or the Old Testament God does not exist or, if the Old Testament God does exist he has a wicked sense of humour.




John


*There are other inherited autoimmune disorders linked to people with other origins. Coeliac disease is of Anglo-Celtic origin. Behçet's disease is sometimes called Silk Road disease and has higher incidence in people of Turkish and Middle Eastern origin.