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.