Tuesday, November 29, 2011

The Sino Forest Independent Committee Report - Part 3.

Sino Forest had a simple enough business model. It held forest and then sold the standing trees to Authorized Intermediaries. AIs (and parties related to them) often sold them the cutting rights.

Sino Forest did not own trucks, chainsaws or employ huge numbers of people because the AIs did all that. All the things needed to run a 17 million tonne per year forestry operation were done by the AIs.

So the AIs you would expect are fairly substantial organizations - bigger than Sino Forest anyway - because the AIs do all the work.

This makes the Sino Forest meeting with the AIs the critical part of the Sino Forest investigation. This was the backbone of Sino Forest. If the AIs were phony then Sino Forest is unambiguously fraudulent.

You can find the full summary of the meetings with AIs here. I am just going to quote the first page. This is not a selective quote (check the original if you want).

Terms Not Herein Defined Shall Have The Meaning As Ascribed In The Second Interim Report Of The Independent Committee Of The Board Of Directors Of Sino-Forest Corporation.
Supplier #1 (OSC Supplier #1)
Location 1
Hunan City #3
(Source:  Provided by SinoForest)
 Site did not have signs or any other indication that Supplier #1 occupied
the location.
 According to an individual from the neighbouring office, Supplier #1’s
office is located on 2/F of the building.  They were unsure whether or not
people worked in the office there.
 Encountered individuals who introduced themselves as Supplier #1 staff,
including one who introduced herself as the Financial Controller.
 Neighbouring occupants stated the office was no longer used and Supplier
#1’s office had moved to a new site located on 6/F of the (redacted)
building in Hunan Location 5.
 Went to new address and confirmed that Supplier #1 shared the 6/F with
Hunan City #3's Government Land Acquisition and Demolition
Remediation Department.
Location 2
Hunan City #3
(Source: SAIC filings)
 This was a factory site previously occupied by Supplier #1.
 The factory is now operated by Other Co #11, a company owned by Other
Co #12.
 According to a factory worker and neighbouring occupants, Supplier #1
moved out in 2009.
 Neighbouring occupants referred to Supplier #1 as "Sino-Forest's Supplier
#1" (嘉漢的供應商#1).
Location 3
Hunan City #3
(Source: Mailing address
provided by Sino-Forest)
 Individuals identifying themselves as Supplier #1 personnel stated that
Location 3 should, in fact, be the same as Location 1 as there was only one
insurance office building on the road.  The address should be (redacted)
instead of (redacted).
Location 4
Hunan City #3
(Source: Mailing address
provided by Sino-Forest)
 This location is the same as Supplier #10 Location 1 and is now a bank
with the office above occupied by the bank itself.
 The security guard for the bank had not heard of Supplier #1.

It goes on:

Supplier #10 (OSC Supplier #10)
Location 1
Hunan City #3
(Source:  Provided by SinoForest)
 This location is the same as Supplier #1 Location 4 and is now a bank with
the office above occupied by the bank itself.
 The security guard for the bank had not heard of Supplier #10.
Location 2
Hunan City #3
 We could not locate Supplier #10 from the address provided.
 Neighbouring occupants had not heard of Supplier #10.

Monty Python could have written this.

Remarkable company Sino Forest: beautiful plumage.


Wednesday, November 23, 2011

Sometimes I am glad I host this blog at Google (Muddy Waters edition)

Muddy Waters Research (of Sino Forest fame) published a negative piece on Focus Media (the American listed stock of a real Chinese outdoor advertising company).

A day later Muddy Waters website is down - albeit with a short message:

MW regrets that our site has been hacked. We will bring it up as soon as possible.  
FMCN is still a Strong Sell. 
Happy Thanksgiving,  

Google does not have a flawless record at keeping Chinese criminals (ahem the Chinese Government) from hacking them - but I suspect they could beat any attempt by an outdoor advertising company.


Monday, November 21, 2011

To be successful

I am reading Jason Manolopoulos's Greece's Odious Debt - an accessible successor to Mark Mazower - and one that reminds you that attitudes to things like tax collectors depend on history. (In Greece for instance Manolopolulos argues that under Ottoman rule not paying taxes - essentially poll taxes on Christians was highly honorable. This still influences Greek tradition.)

Chapter Two however starts with one of the best quotes I have ever seen:

To be successful, keep looking tanned, live in an elegant building (even if you're in the cellar), be seen in smart restaurants (even if you nurse one drink) and if you borrow, borrow big.
-Aristotle Onassis

Seldom have I seen a business/political philosophy so diametrically opposed to mine stated so clearly. And exemplars abound - think Angelo Mozilo in American finance or Andrew Peacock in Australian politics.

Just a fabulous quote and a world view that seems to work for the people who hold it if not for the rest of us...


Saturday, November 19, 2011

Oversimplification and financial crime (Felix Salmon edition)

I sometimes joke that straight accounts like virginity refer to one state only - whereas financial crime - as does sin - refers to a multitude.

This blog aims to provide - in part - a morphology of sin - and alas like the loss-of-virginity and relationships that ensue - it is complicated.

Not everybody always sees it that way. Felix Salmon posted about "The Return of Obvious Graft" which is about three financial crimes and how simply he sees them. I quote:

It’s almost comforting to find a spate of financial scandals which involve simple, easy-to-understand illegal and unethical behavior, after all these years rummaging around in synthetic mezzanine collateralized debt obligations and the like. Three have particular salience right now: 
(i) The Congressional insider-trading scandal. Spencer Bachus is the poster boy here: one minute he was getting highly confidential briefings from Hank Paulson and Ben Bernanke on the parlous state of the economy; the next he was loading up on contract options on Proshares Ultra-Short QQQ, a synthetic ETF designed to maximize profits when the stock market falls, and which is emphatically for day traders only. 
(ii) Olympus, which now seems to have channeled more than $2.5 billion to yakuza crime syndicates, including the country’s largest, the Yamaguchi Gumi. 
(iii) MF Global, which increasingly looks as though it stole money in customer accounts.

I am surprised that Felix - who is a bit of an aficionado of this sort of stuff - should boldly state that these three involve "involve simple, easy-to-understand illegal and unethical behavior". Felix is - I think - wrong about all three. In the second case I think Felix's error is important because it has investment implications.

Congressional trading scandals

The congressional trading scandal is simple enough - I can't think of any way in which is ethical for someone like Spencer Bachus - who is elected to represent a broad electorate - to use information that he gains as a representative to trade against the same people. Conflict of interest springs to mind. The problem is - as the article Felix links indicates - that the behavior probably isn't illegal. It should be. I don't disagree with Felix's sentiment here - just the fact of illegality is not clear.


The Olympus scandal is alas much harder. I spent about eighteen (almost continuous) hours recently looking at Olympus. I wish the story was as simple as Felix indicates because you would buy the stock with your ears pinned back. If the story was that $2.5 billion were simply stolen then you would have a business that could generate $2.5 billion (which makes it a very valuable business) and the looting would  likely stop now. If the story was as simple as Felix says you would buy the stock as the business will continue to be highly profitable and the stock has cratered.

But Felix's story isn't even the official story now. The official story is that Olympus made some very large (albeit genuine) trading losses over a decade ago. It hid them. And hid them. And hid them. And its books did not balance so the hiding involved many senior staff. Then after many years (and towards the end of the careers of the malefactors) they sought to bring the books back into balance. So they jigged up some large fake acquisitions and paid a couple of billion for them. The money however was not looted - it was recirculated to fill the hole in the balance sheet from the trading losses.

If that story were true you would still probably buy the stock because that is still a story about a very profitable underlying business that will probably retain its profitability and a stock that has cratered.

Alas I am not sure even that story is true. At the core of Olympus is an amazingly profitable medical devices business. It makes gastrointestinal endoscopes - devices you stick you know where - and look for colorectal cancer. These devices are also used in operations. Stated revenue for this segment was 355 billion yen and operating profit was 69 billion yen. Put this in dollars because I don't think in yen - that is $4.6 billion in revenue and $890 million in operating profit. That is a lot of profit and a lot of revenue from peering where the sun don't shine.

My fear was that was too much profit. I could not convince myself that this business should be as profitable as all that. An alternative hypothesis occurred to me - which was that Olympus was sharply overstating the profit of its core medical devices business. Over time their accounts would then shift from reality - possibly by cumulatively more than a billion dollars. So some day they would chose to fill the hole (just as they supposedly filled the hole on the hidden trading losses). And then they did the fake acquisitions.

If my alternative hypothesis is correct then the case for buying Olympus stock evaporates. What you have is a cratered stock and a business that had been fraudulently overstating profits for years. And it has a lot of debt.

The underlying low-level-of-profitability hypothesis is more consistent with the debt load.

Olympus just isn't as simple as Felix makes out - and the differences have investment implications. If only it were simply looted.

MF Global

What happened at MFGlobal is not clear. There is no question that client cash is missing - but there is some doubt as to whether it was "stolen" or whether something else happened to it.

A US based broker-dealer (though not broker-dealers in other jurisdictions) is obliged to keep client assets (usually securities) separate from firm assets. Usually this means that client assets which are not required to be pledged to support client balances are kept in a client segregated account. Client assets are allowed to be pledged but only to a low multiple (usually 1.4 times) the client balance and then only to support client obligations. In other words client assets can be pledged if the clients are leveraged.

Client cash is also meant to be segregated under similar terms. The problem is that client cash is not kept as cash - that is it is not bits of paper sitting in vaults. Client cash is kept as people usually keep cash - in bank deposits when it is small in volume and maybe in short dated government securities when it is large in volume. Brokers have always been allowed to buy government securities as a use of client cash.

If they held Euro cash then they would presumably be allowed to buy Euro government securities (and in Europe now that means German Bunds).

Robert Lenzer in Forbes suggested (and possibly with good evidence) that the cash was held as Italian, Greek and Spanish government bonds - possibly longer dated. These are Euro government bonds held against Euro cash - which would be OK if it were US Government bonds against US cash. But in Europe its a problem: European governments can't print the Euro so they are not riskless and the assets were long dated. In which case MF Global may have legally speculated with client money. This is not the simple, easy-to-understand illegal and unethical behavior of Felix's blog post - rather a glaring policy loophole. Moreover Lenzer suggests that MF Global actively lobbied to keep the loophole open.

Still I am not even sure of the Lenzer story. There is a story doing the rounds in Asia (meaning I have heard it from multiple sources) that Deutsch Bank and/or Goldman Sachs got the client assets - the client assets were posted as collateral maybe for client positions and maybe for MF Global's own positions. And the bulge-bracket guys snitched it.

Now if it were clearly marked as client collateral and DB or GS snitched it then the big-boys would be involved in theft. But if were not clearly marked as or somehow DB and GS were not informed that it was client collateral then DB and GS would be entitled to grab it. And if they grabbed client collateral then alas it is not there for the clients.

So it is a real question as to what collateral was posted to whom and who snatched it. That will be litigated for a long time - and a malicious - or for that matter a not-guilty party at MF Global is likely to tell the jury that they posted the collateral to Goldman Sachs and clearly told Goldies it was client collateral and that Goldman Sachs pinched it anyway. It may be a simple crime - but a simple defense - and one that many people would find intuitively appealing - is that Goldman Sachs et al, not MF Global, stole the money.


All I am saying is that Felix has picked yet another three which do not meet Felix's criteria of "simple, easy-to-understand illegal and unethical behavior". Financial crime - like any morphology of sin - is complicated. Almost always.


Friday, November 18, 2011

The Sino Forest Independent Committee Report - part 2

Sino Forest's Independent Committee of Directors has - as explained before - concluded there was no substantial fraud at Sino Forest.

Here without adornment is another paragraph (paragraph 54) from the process memorandum sent by the Independent Committee's legal and accounting advisers to their law firm:

The extent of historical electronic data (e.g. emails) at the Guangzhou office where two of the senior members of Management are located (CHEN Hua and Albert ZHAO) was almost non-existent. There was no backup of the email server (according to Management, the email and file servers were not being backed up at this location). The earliest email retrieved from Ms. Chen and Mr. Zhao’s computers and servers was dated June 10, 2011. It is to be noted that the IC Advisors attended at the aforementioned office on June 13, 2011 for data preservation but access to the company servers and IT staff was denied by Ms. Chen. Subsequently, on June 15, 2011, the IC Advisors were provided access to commence data preservation.

Wednesday, November 16, 2011

The Sino Forest Independent Committee Report part 1.

Sino Forest - a Chinese forestry company listed in Canada - is the subject of the most spectacular fraud allegation of this cycle of Chinese frauds. The allegation was made by Muddy Waters LLC (MW).

The allegation had three prongs:

(a). The forests largely did not exist
(b). Where they existed the valuations were determined largely by phony transactions with undisclosed related parties (the so-called Authorized Intermediaries or AIs) and
(c). There was no evidence that that many tonnes of wood was harvested in the relevant areas in China - there was for instance nowhere near the necessary number of log trucks.

After the allegations several of the non-executive directors formed an "Independent Committee" (IC) to investigate the claims.

The IC has reported and declared the MW allegations to be false. In particular they declared they have seen documents proving the accounts are (mostly) accurate and they are confident in the authenticity of those documents.

The press originally reported on the IC report as definitive. They have become a little more nuanced since.

Anyway I plan on extracting parts of the supporting documents for the IC report - the most interesting document released so far being the "process memorandum" which outlined the IC's processes.

This part - Paragraph 83 - is concerned with checking the authenticity of the documents purporting to evidence ownership of forests (either land or more often cutting rights or plantation rights certificates).

It is on the basis of the evidence presented here that the IC is confident that the MW allegations are false. I am (proudly) short Sino Forest so I am biased. I am just going to repeat Para 83 verbatim. You can decide.


83. There are a number of factors which have affected the forestry bureau visits and confirmation process:
(i) Management did not provide a comprehensive list of plantation assets which reconciled to its financial statements until June 23, 2011;
(ii) Shortly after the MW allegations, Management, on its own initiative,caused all forestry bureau confirmations to be relocated from their various locations throughout the SF organization to Guangzhou. This resulted in delay in these documents being made available to the IC Advisors.Management explained the forestry bureaus wanted the confirmations returned as they may have exceeded their individual authorities in confirming certain rights. However, the confirmations were not returned to the forestry bureaus and were sighted by the IC Advisors in the offices of Chinese counsel to SF; 
(iii) Forestry bureau officials are not required to meet with any party regarding the confirmations or the process they had undertaken in issuing those confirmations. 
(iv) Prior to August 29, 2011, the process determined by the IC did not allow the IC Advisors to ask any forestry bureau any questions relating to the existing confirmations; 
(v) The IC Advisors have not had visibility into the process regarding the setting up of meetings relating to existing or new confirmations. Judson Martin, in his capacity as CEO, has agreed to provide a letter of representation to the IC with respect to the process undertaken while he has held this position; 
(vi) The IC Advisors were directed by Management to visit Yunnan FB #1. This forestry bureau further directed the IC Advisors to go to one of its subordinate county-level forestry bureaus (Yunnan FB #2); 
(vii) In all four instances where new confirmations were obtained, the forestry bureau or other parties who issued the confirmation did not sign the new form of confirmation as sought by the IC Advisors but instead prepared their own versions whereby ownership is not confirmed and only a contractual arrangement between SF and its Supplier is recognized; 
(viii) The time made available for the meetings with forestry bureau officials has been limited and the IC Advisors have not been permitted to ask certain questions; 
(ix) Due to the limited number of senior SF employees/Management participating in meetings at the forestry bureaus with the IC Advisors, the processes at the various forestry bureaus were conducted consecutively rather than concurrently; 
(x) The process for SF employees to arrange meetings with forestry bureau officials has taken some time; 
(xi) Certain forestry bureaus have deferred or not permitted the IC Advisors’ requests to access the plantation rights registries. Others have advised they have not yet established a searchable registry of plantation rights. The forestry bureaus also indicated they do not issue new PRCs for the transfer of standing timber alone. As such, the IC Advisors have been unable to confirm the existence of the PRCs during the IC Advisors’ visits; 
(xii) In some instances, forestry bureaus would not issue the new confirmations using their letterhead, which is inconsistent with prior practices. 
(xiii) Certain forestry bureaus have given few details as to what due diligence processes they have undertaken before issuing both the existing confirmations and the new confirmations. 
(xiv) At a meeting at Hunan FB #1 on September 2, 2011 to validate the authenticity of the existing confirmations, Management represented a forestry bureau official to be the Forestry Bureau First Vice Chief when in fact this individual was no longer in the position of Vice Chief, and had been paid by SF for several months prior to the visit to act as a consultant for SF. The IC Advisors understand this meeting was recorded by SF employees, but have not been provided with a copy of the tape. 
(xv) The new confirmation obtained at the Hunan FB #2 was not issued by the forestry bureau; rather, it was issued by a “social institution legal person” sponsored by the Hunan FB #2. The relative degree of comfort of this confirmation as compared with the new confirmations from forestry bureaus is not clear. 
(xvi) During the Hunan FB #2 visit held on October 18, 2011 the IC Advisers were informed by the former Chief of the bureau, FB Official #1, that Vice Chief FB Official #2 was assigned by the forestry bureau to work with SF since approximately 2008 to assist SF in conducting its business. The IC Advisers were informed that FB Official #2 continued to receive a basic salary from the forestry bureau while working with SF. They were also advised that this practice occurs with other companies. 
(xvii) The new confirmation obtained at the Yunnan FB #7 was not issued by the forestry bureau; rather, it was issued by a division of the bureau, namely, the Yunnan Forestry Entity #1. The relative degree of comfort of this confirmation as compared with the new confirmations from forestry bureaus is not clear. 
(xviii) The IC instructed the IC Advisors not to make direct contact with forestry bureau officials. The IC explained that Management cited strong concerns that such contact would negatively impact the Company’s relationship with the forestry bureaus.

Friday, November 11, 2011

Buy Ben Bernanke a marijuana pipe and an Hawaiian shirt

Edward Harrison annoyed me this morning. He writes the useful but sometimes disagreeable Credit Writedowns blog and he has a post up on why the Fed should never buy Italian Government bonds. His conclusion - which sounds reasonable but is dead wrong is repeated below.

First of all, a central bank’s buying dodgy assets is always a solution to a liquidity crisis that is fraught with peril. if those assets go bad and losses are crystallized, it could render the central bank technically insolvent and undermine confidence in the central bank. Fear of this technically insolvent outcome was a major reason the Europeans did not allow the ECB to participate in the ‘voluntary’ haircuts that it has attempted to coerce onto the private sector in the latest Greek bailout. 
Clearly, the ECB could just print money and use the seigniorage from that printing to earn its way back into solvency without having been declared insolvent. But you can see the problem. To maintain the ECB’s credibility it would need to be recapitalised. 
But if the Federal Reserve were to load up on Italian bonds, then the seigniorage route is out. The Fed would be exposed to default on foreign currency assets. If Italy defaults, then the Fed is on the hook. Officially, the Fed is under Congressional jurisdiction. The US Congress has oversight of the Federal Reserve and Congress should never allow the Fed to make unsecured loans to foreign governments without prior and specific Congressional approval. 
The Fed should never buy foreign currency assets. And if it does, Congress should intervene.

America's monetary problem however is that they are in a liquidity trap.

Six or seven years of 6 percent inflation, 2 percent interest rates and to stick the losses to the Chinese who (in their mercantilist fashion) own the debt would be a wonderful way out of America's malaise. And you would think you could induce 5 percent inflation by printing money. You would think the option is open. Indeed you would swear given how much money the Fed has printed that it would have happened.

But it has not happened.

Sure the Fed has printed money. And when it finished that it printed some more. Soon we will get to QE4 and yet another round of "quantitative easing" and we will still not manage to induce 5-7 percent inflation, 2 percent interest rates and to stick the losses to the Chinese.

If you had - without any understanding of monetary theory - been told that the Fed could increase money stock from say $800 billion to $3 trillion and not result in an inflationary torrent you would not have believed it. It would have sounded like nonsense.

But you better believe it because it happened. And that requires an explanation.

The explanation is simple enough. The Federal Reserve has too much credibility. Each time it increases the money supply it buys some asset (say a government bond or even a foreign security) and issues cash. And people hold the cash because it is a reasonable store of value. And it is a reasonable store of value because they trust - at the end of this cycle - that the Federal Reserve will eventually take its vault full of assets, sell the assets for hard cash (which it will destroy) and will thus suck the excess liquidity out of the system.

If people really believed the cash was trash they would all try to get rid of it (ie buy something) but collectively they could not get rid of it (every time they buy something it would have a new owner) and the result would be inflation. Inflation would then reduce the real value of the money stock to a level where people were comfortable holding it.

To get inflation you need to damage the Federal Reserve's credibility. You need the Federal Reserve to make a credible promise to be reckless.

And Ben Bernanke - despite the helicopter speech in which he outlined this view of the world very clearly - is not your man. Maybe it is the facial hair - but he looks - well just too responsible.

When he got on 60 Minutes he proved the point. He was asked point-blank whether the Federal Reserve could print all that money and control inflation and he said it could. He was right of course - but it was the wrong message. He had his one-mass-market-opportunity to be credibly reckless and his media-conservatism meant that he squibbed it. He should have just said that he did not know but that it was a risk that was necessary to take...

When he appeared all media-conservative I knew he blew it. I was thinking then of asking for his resignation because he was just not up to the job that he himself outlined in the famous helicopter speech.

But the European crisis gives the Fed Chair the opportunity to get it right this time being being credibly reckless. Indeed what I want is for him to be incredibly reckless. He should not only announce that the Fed is buying Italian debt. He should do it whilst wearing an Hawaiian shirt and carrying a marijuana pipe. (I would even buy him the pipe...)

Ok, the marijuana pipe is not happening - but I dream of a day when a central bank knows that the best way out of a debt-deflation is inflation induced by deliberately and credibly reckless policy rather than an endless austerity-recession and deflation.

In this case - where the debt is held disproportionately by the Chinese the Fed has an opportunity to stick the losses to someone else. Come on Ben - what do you say about that?

And when we are done we can sit down, you can have a joint and I will have a beer.


Post script: Edward Harrison reminds me (fairly) that he is not generally opposed to inflationary solutions and he (fairly) thought that this post implied he was. I am diametrically opposed to his view about the necessity to maintain Federal Reserve credibility. Indeed few things have annoyed me quite as much as the referred to post. However we are closer much of the time.

Post post script: Ed Harrison thought that the issue was democracy - congressional oversight of buying of foreign bonds. That I think is peculiar - central banks have been buying foreign bonds since - well - forever. It is how they hold foreign reserves. But he does think it unreasonable and subject to oversight for a central bank to buy stressed foreign bonds. Respectfully I disagree - but that is another story.

Monday, November 7, 2011

Trina Solar updates guidance (part 2)

After the results note: We now - post the result - know the difference. They took a charge - only thinly disclosed - on receivables  Someone did not pay them!

Note: the post script is an important part of this story. My original blog post was too hasty in making an assumption about third-party module sales.

The Trina Solar press release updating guidance has me utterly perplexed (and I follow this stock closely).

Here is the key text:
The Company estimates its solar module shipments in the third quarter of 2011 to be in the range of 372 MW to 375 MW, compared to the Company's previous guidance of 480 MW to 520 MW for the reasons discussed below. Additionally, for the third quarter of 2011, the Company estimates: 
* Gross margin relating to its in-house wafer production and module production to be in the range of 18% to 19%, in line with the Company's previous guidance of high teens in percentage terms; and 
* Overall gross margin to be in the range of 10% to 11%, which includes a non-cash inventory write down of approximately $19 million, compared to the Company's previous guidance of mid to high teens in percentage terms.
This had me reaching for my calculator. Shipments of 372-375 MW - lets call it 374 MW as a reasonable average. Gross margin of 18% to 19% from wafer production - so lets call it 18.5 percent and in-line with their guidance. Gross margin of 10% to 11% - lets call it 10.5% - after an inventory write down of approximately $19 million (which compares to the old high-teens margin).

So by simple subtraction we estimate that 8 percentage points of margin represents $19 million. This suggests that the total revenue is = $19 million /.08 = $237.5 million.

But that is the revenue from 374 MW - so revenue per watt = $237.5 million/ 374 million watts = $0.635 per watt.

The lowest solar panel price mentioned in any analyst report I have seen is $1.08 per watt.

Under 64 cents per watt is either a catastrophe inconsistent with any observable solar panel price or there is a significant charge the company is not disclosing.

Which is it?


Post script. Some people have observed the typical 3 percent difference between IN HOUSE wafer production and END GROSS MARGIN - the difference being third party panels they buy in and then distribute.

They then calculate 5.5 percent margin difference - implying ASP in the 90s. Plausible - but still a disaster.

I had discounted this. Reason: I did not think there would be many third-party product sales when they are storing their own stuff in warehouse and can't sell it and are cutting production. That was a guess only. Their own production cut is so severe that third-party sales through their channel just look unlikely.

But maybe there really are large third party sales remaining. There might be a few reasons - but I am open to suggestion. Here goes for some thoughts:

(a). They are contractually obliged to sell for third parties and they have contractual expenses larger than they are telling us, or

(b). They still sell for third parties because the third parties can deliver cheaper than their marginal manufacturing cost, or

(c). The third party stuff is higher quality, or

(d). The collapse in volume was so total that there were third party sales in the beginning of the quarter but not in the end - so third party sales were a realistic part of the story but will not be next quarter, or

(e). Something I can't think of.

I was thinking - falsely perhaps - with the disastrous delivery numbers - that the third party distribution would be cut to zero. I should have put that assumption in my note.


Friday, November 4, 2011

Trina updates guidance (part 1)

Trina issued updated guidance yesterday. This unsurprisingly included an earnings downgrade and a decline in margins. Somewhat more surprisingly it included a massive shipment volume downgrade.

To quote:

The Company estimates its solar module shipments in the third quarter of 2011 to be in the range of 372 MW to 375 MW, compared to the Company's previous guidance of 480 MW to 520 MW for the reasons discussed below.

And the reasons discussed below are:

A deflationary pricing environment impacted by challenging financing conditions for some of our customer's European projects resulted in the shortfall of our targeted shipment volumes.

This guidance was for the period ended 30 September 2011.

The decline was - unsurprisingly blamed on challenging financing conditions in Europe.

The reason why a huge shipment volume downgrade was surprising was because the last guidance was given in a conference call on 23 August 2011, in other words when the quarter was more than half done.

And in that conference call they actually saw a pickup in demand in Southern Europe. To quote:

Mark Kingsley (COO): I have been waiting for Italy since I got here. So, we are actually seeing some good activity finally. And we have some pickup in activity. We see it. Obviously, our historic Italian account is at the utilities. We also see Spanish accounts that a lot of them actually served projects there. So, after much waiting and unclarity, we are seeing some pickup in demand. There is – we still have a mix of utility projects in commercial rooftop there. And so what we are seeing moved quicker was the stuff that was utility that was finishing off and now it’s blending into commercial rooftop.

Now Mark Kingsley's comment was not forward looking. They were "actually seeing some good activity" in Italy and "some pickup in demand" in Spain. These were historical comments not protected by the various safe-harbors in the securities law. So they must be true or Mark Kingsley is going to be subject to securities fraud claims. And Mr Kingsley is not a Chinese executive - he has to live with his historical comments so I figure he must be telling the truth.

Whatever: volume came in more than 20 percent lower than an estimate made in the last half of the quarter. 

Presuming as I do that Mark Kingsley was telling the unvarnished truth as it was on 23 August then demand in Europe must have fallen close to zero for the remainder of the quarter.

That is even worse than I thought.


Thursday, November 3, 2011

Andy Borowitz and the buy case for Bank of America

Andy Borowitz (a daily email you must have) lays out the buy case for Bank of America succinctly:

A Letter from Bank of America

An Apology to Our Customers

NEW YORK (The Borowitz Report) – The following letter was sent today by Bank of America to all of its debit card customers:
Dear Valued Customer:
As most of you probably know by now, last month we instituted a $5 monthly fee for all of our debit card users.  To say that what followed this decision was a shitstorm would be a massive understatement.
Considering that just three years earlier taxpayers had bailed us out with billions of their hard-earned dollars, it’s understandable that Bank of America was compared to a person who, as he is pulled from a burning building, turns and kicks the fireman in the nuts.
That’s why we are writing to you today with a simple message: “Our bad.”  And to tell you that we are refunding the $5 to you, effective immediately.  All you have to do is pay a simple, one-time $10 refund fee.
You can receive your refund online, or pick it up at your nearest Bank of America branch, where a teller will hand the money directly to you for a simple, one-time $15 handling fee.
If you do visit your branch, feel free to use any of our services, including our state of the art ballpoint pens and deposit slips.  (Prices on request.)
Again, accept our apologies for instituting the debit card fee.  We have learned our lesson, and we make this solemn promise: next time we squeeze money from you, we’ll do it in a way you won’t notice.
Bank of America

General disclaimer

The content contained in this blog represents the opinions of Mr. Hempton. You should assume Mr. Hempton and his affiliates have positions in the securities discussed in this blog, and such beneficial ownership can create a conflict of interest regarding the objectivity of this blog. Statements in the blog are not guarantees of future performance and are subject to certain risks, uncertainties and other factors. Certain information in this blog concerning economic trends and performance is based on or derived from information provided by third-party sources. Mr. Hempton does not guarantee the accuracy of such information and has not independently verified the accuracy or completeness of such information or the assumptions on which such information is based. Such information may change after it is posted and Mr. Hempton is not obligated to, and may not, update it. The commentary in this blog in no way constitutes a solicitation of business, an offer of a security or a solicitation to purchase a security, or investment advice. In fact, it should not be relied upon in making investment decisions, ever. It is intended solely for the entertainment of the reader, and the author. In particular this blog is not directed for investment purposes at US Persons.