Saturday, May 30, 2015

Regret theory in practice

I am on holiday in Italy until - well - today - when I go to Germany for work.

I rented a car.

Supplemental insurance for the car - which reduces excess from 2000 Euros to zero - was 14 Euro per day (for nine days). The car is automatically insured beyond a 2000 Euro excess.

I did about twenty seconds thinking and elected (against my wife's wishes) not to take supplementary insurance.

The logic:

(a). I pay about $800 a year for a $40,000 car in Australia. It gets driven a lot. That works out at under $3 per day - and it covers considerably more than the supplemental insurance - which makes the supplemental insurance look expensive.

(b). Against this I would be driving about 5x average - somewhat offsetting this - and on the opposite side of the road. Thought of that way the insurance is not massively mis-priced.

I figured there was less than a 10 percent chance of a dingle - but more than a 5% chance. The insurance looked expensive. I am a hedge fund manager and paid to take rational bets. So I declined the insurance.

You guessed it - I had a dingle.

The 2000 Euros is financially irrelevant to me. [It is way less than I risk, personally, every day in the stock market.]

But I am surprisingly, irrationally unhappy about not taking the insurance.

It is widely observed that people (likely including my clients) are irrationally affected by small losses.

But they pay me to be rational. And I insist on being so - but it is harder than it looks.


Thursday, May 28, 2015

Is anyone other than me rattled by the FIFA arrests?

Soccer (or what most the world calls "football") is barely an American game. None of the FIFA officials arrested are American citizens and none of the alleged crimes involved American citizens.

And yet FIFA officials are subject to American extradition warrants on the basis of American law.

This is from one of the countries that is not a participant in the International Criminal Court and does not like to subject itself to international law.

I have little doubt that FIFA is corrupt. And I don't doubt it deserves to be cleaned up.

But try this scenario. A country (say France) makes it illegal to emit greenhouse gases above a certain quantity in non-compliance with international agreements. US utility executives (who emit huge amounts of greenhouse gas) are travelling in a third country (say Switzerland) and get arrested to be tried in France.

Would you be comfortable?

I would not. But you could reasonably argue that ensuring the planet is not despoiled is more important than cleaning up corruption in football. And you could reasonably argue that emissions in the United States affect France far more than say soccer corruption affects the United States.

This is just anti-democratic. We non-Americans did not vote for the US laws and the US legal system is not responsive to our votes.

But the US system applies to us even when we are not dealing with Americans.

It seems strange to me to explain democracy to Americans - but alas it seems Americans have forgotten the tyranny of foreign laws.


Postscript. It seems some of the crimes involved US Citizens and on US soil... but the extraterritorial claim is still made. Some are non US citizens concerning Brazilian tournaments.

Many people commented on extradition treaties requiring the crime be a crime in both jurisdictions... but the arrests took place in a third country - Switzerland - that had tenuous links to the crime.

This editorial is also to the point...

Friday, May 22, 2015

Hanergy: let there be no doubt

Background: Hanergy is a large cap solar cell manufacturer that has been suspended on the Hong Kong market. The biggest shareholder supposedly lost USD14 billion in one day

Now that Hanergy has been suspended I can let these out.

I went to visit Hanergy's main factory in China about a six weeks ago. It was almost entirely silent. There was essentially no production of solar cells at all and the accounts that suggest significant production and sales are entirely fraudulent.

There was some evidence that someone was exploring starting production - and I will get to that - but the factory was almost entirely idle.

Here are a few photos.

This is the plant. There were almost no cars despite a vast car park. All gates except one were locked.

There was a single truck being loaded with solar cells - so there was *some* production. However this truck was being loaded when we arrived and still there when we left two hours later. This plant if it had any production at all had it only a trial basis. The accounts that suggest substantial production are false.

This is another photograph of the main drive to the plant. One car was parked. There was no movement.

This I found particularly bizarre. There were solar cells set up around the plant Some of them were set up in triangle-patterns. This is the only place I have ever seen solar cells set up so that they are not orientated towards the sun.

I walked around the enormous plant. Not a truck went by and the only people we saw except at the side were the gardeners. (There were several of them - and we asked them if it ever got any busier. They confirmed it did not.)

However on the side there was a shaded area with some motorbikes parked - which suggest that the plant is not entirely idle. Just almost.

Strangely two white guys walked out of the plant. I think they were Americans trying to sell some technology - maybe sales guys from AMAT - but I am only guessing. I tried to signal for them to come over but they did not.

There has been much press that compares Hanergy to other solar companies and suggests there may be disruptions in the market for panels. Garbage I say. The right comparison is Sino Forest or Longtop Financial Technology.

Hanergy barely existed.


Disclosure that will annoy my clients. Despite sitting on these we were not short Hanergy. Too much squeeze risk for my liking.

Wednesday, May 20, 2015

Follow up from the McDonalds property post

There is no point reading this blog post without reading the prior post (linked here) first...

So many people thought the last blog post was wrong that I need to take it seriously. Several Europeans who claimed direct knowledge of the traffic in that McDonalds in Milan suggested it was profitable.

One person tartly tweeted that my post was from the "Thomas Friedman school of observing something inconsequential and developing an unverifiable explanation".

Here is how I thought about it...

Here is the P&L from McDonalds in 2014.

I am assuming this was a company owned store - and I will not allow any of the generalised SG&A to be billed back to this store.

Company stores had 18.17 billion in revenue and 15.29 billion in direct costs (listed as food and paper, payroll and occupancy etc). This is about an 18 percent margin.

This store was (ignoring Venice*) in the most expensive place to operate in Northern Italy. I roughly knew these numbers and it was almost inconceivable to me that this store isn't 18 percent worse than the average MickeyD's in terms of operating costs or the like.

That suggests the received wisdom about the lack of competitiveness of certain European countries (and the need for an internal devaluation or deflation) is wrong. Staggeringly wrong. Now whilst I am bullish on many European names and I am here looking for prospective investments but I am far from that bullish.

I come from another expensive country (Australia) where cost-competitiveness doesn't look all that good. McDonalds has only closed a few stores - but it has downsized several in high cost areas near me. A small high-cost store seems to be acceptable. A large one, not so much.

The store in the high-cost but highly trafficked Bondi Beach is small. It never looks profitable, but I may be wrong there too.


*Venice is a frighteningly expensive special case at least in part because the logistics are difficult.


An alert reader tells me that this site has a history of concessional rent - and has been the subject of legal action.

Maybe that explains it.


Tuesday, May 19, 2015

McDonalds: property, ego and identity

I have just spent a few days in the modern Middle East cities of Doha and Abu Dhabi. This is the only place I have seen which matches China for just sheer excess of the property market. There are beautiful skyscrapers on what should be worthless land surrounded by barren streets and the odd drip-irrigated palm tree.

It's pretty clear what is going on here. These countries see airlines and skyscrapers as symbols of national importance and they build both without regard to cost.

But all in all it made me think of the superiority of our Western liberal system. We have bubbles of course - but nothing like this.

In Abu Dhabi I saw very beautiful skyscrapers with government employees spread at one employee per 120 square metres. You could play cricket inside the building and nobody would notice. Just empty space.


So I get to Milan - and 50 metres from the Duomo I am wondering through a very famous shopping arcade in the early morning. Here is the photo.

 Turn around 180 degrees and this is the view:

Yeah, there it is, Mickey D's (NYSE:MCD).

They can't possibly be making money here - just planting the flag amongst all the Italian restaurants.

This is a statement of ego rather than anything else. It doesn't have the grandiosity of Doha, but then McDonalds is not as rich as Qatar. The ego/motivation is the same.

They would be better off closing this and dedicating the savings to keeping the toilets in the US restaurants clean.

But then property has often been a statement of ego - and US mega-corporates are not immune.


PS. If Carl Icahn controlled a big stake in MCD this store would close. Carl often brings some rationality to these things.

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