Thursday, March 24, 2016
Do you want to die with dignity? There is a coupon for that.
They bought an out-of-patent drug (Sodium Seconal) which is used in physician assisted suicide - and after the California government passed laws to make the above legal they jacked the price up to $3000.
The Skeptic goes one step further - and points out consistent with Valeant's business model there is a copay coupon so that you, dear patient, are not out of pocket, whilst your insurance provider takes the hit.
So, if you want to die with dignity there is a coupon for that:
Monday, March 21, 2016
Mr Ackman's letter to the Allergan board
Friday, March 18, 2016
A technical question on Herbalife for Mikeo: What happens to distributorships on the death of the distributor?
This is a question for those who have spent too much time thinking about good versus not-so-good multi-level marketing schemes.
I apologise in advance for the very narrow subject matter.
@mikeo188 is an anti-Herbalife account on Twitter. (S)he is very well informed seeming to know the news from the anti-Herbalife camp before it is public.
As someone who is long Herbalife (and has done considerable work) I still take Mikeo seriously. It is Bronte's policy to seek out opponents of our views so we can test their arguments.
Mikeo asked me if I had seen the ESPN piece on Advocare. Sure.
Then asked me what the difference between Advocare and Herbalife was. I said plenty if you looked on the ground (and I have looked on the ground).
But I want to ask a question in response.
Herbalife and Advocare have very different policies as to what happens to the ownership of a distribution business on the death of a distributor.
Here is the Advocare policy:
It is in the full document somewhat more complicated - but the sentiment is that a distributorship ends at the death of the distributor and the upline distributor then gets the income. It is very hard to maintain a distributorship even with an active will.
And here is the Herbalife rule which allows a period of distributor inactivity in which continuity rules do not apply:
The Herbalife rules are designed to ensure the continuity and inheritability of the business.
To the people who claim to have done all this research into Herbalife - can they please explain why Herbalife has such different rules?
Tuesday, March 15, 2016
How to judge Valeant in 2016
Only a few months ago they stated that this was how they should be measured in 2016.
Today there will be another call.
I wonder what has changed?
Monday, March 14, 2016
Questions for the Valeant conference call
It is "preliminary" because numbers have not been audited yet. I expect an audit statement to be coming. I have never had a major problem with Valeant's GAAP numbers (which are terrible). My objection to their numbers is largely to the non-GAAP earnings that they promulgate widely and which are widely quoted by analysts.
I suspect ultimately their auditor may not have major problems with the GAAP numbers (other than certifying that Valeant is a going concern). The GAAP numbers don't smell wrong.
In that vein I have only main question.
Can you break down your guidance for non-GAAP "cash EPS" into your estimated GAAP earnings and your budgeted non-recurring or non-cash expenses (such as restructuring expenses or amortisation) that I should ignore for the purposes of your GAAP EPS?I ask this because Valeant non-GAAP numbers ("cash EPS") bear only minimal resemblance to the numbers in the accounts. Some of the difference between GAAP EPS and "cash EPS" is clearly justified. Some less obviously.
But from the outside it looks like business divisions can make their non-GAAP numbers by producing reasonable enough GAAP numbers and then marking any inconvenient expenses as "non-recurring". If a budget for non-recurring expenses is published this will help vouch for the integrity of non-GAAP numbers.
There is a follow on question: given the GAAP numbers are "messy" some covenants will be broken.
Can we have a list of broken debt covenants and a list of the consequences of those breaches? To my understanding the main consequences are restrictions on further borrowings and cash-traps for the benefit of debt holders if businesses are sold. However the documents are extensive - and there may be issues I am unaware of.
Thanks in advance
Sunday, March 13, 2016
The LA Times explores Valeant's business model
In America it is somewhat more complicated - and an insurance company winds up paying about $2500.
Go read it.
After the exposure of Philidor (which was a device to deceive insurance payers) it can't be long until Valeant gets total payment kick-back.
The end is nigh.
Friday, March 11, 2016
Citron on J2 Global
Far more detailed than my earlier posts on that company.
Tuesday, March 8, 2016
Being punished for doing the obvious: Peabody Energy Corp edition
But Peabody Energy is particularly stretched.
Here - courtesy Thomson Reuters - is a price chart for the 6% coupon Peabody debt due November 2018. Its a large issue with almost 2 billion at face value outstanding.
The price is 3. That is 3 cents in the dollar.
The yield to maturity is 266 percent.
If Peabody survives without a restructure this piece of debt will make you over thirty times your money.
Obviously the debt market thinks that Peabody is dead. Dead parrot dead.
Go tell that to the equity market.
This is Peabody stock yesterday courtesy Yahoo Finance.
Yes the stock was up 40 percent.
And if the company survives it is vanishingly unlikely to be a thirty bagger.
So it is kind of obvious that you should be long the debt, short the equity. It is very hard to construct a scenario where you lose.
Except that it was darn obvious 100 percent ago in the trade.
So here is what happened. Some wise-cracking hedge fund put on the trade, long the debt, short the equity. Can't lose except that they did lose.
They are getting smashed.
The debt has come down rapidly from 25 to 3 wiping out the long side of that transaction. The equity has doubled.
And our hapless manager - having been perfectly rational - is left nursing some sore losses.
A general comment
This is happening all over the energy complex at the moment. Debt and equity markets disagree and the disagreement has got wider and wider.
There will be some very bruised arbitrage managers this week.
Very bruised indeed.
PS. Disclosure in order. We have a few of these trades on in tiny size. We are down low-single-digits this month. We are not enjoying it. But we are enjoying it far more than the soon-to-be-out-of-work manager who decided to put the Peabody trade on.
If you can't be ethical at least do a well-executed cover up (a comment on Commonwealth Bank of Australia)
After the travesty detailed by Four Corners CBA promised to be the "ethical bank".
Today Four Corners was back with an expose as to how CBA has systematically denied insurance claims for trauma and other medical maladies. This was through their business arm called CommInsure.
You can find that program here.]
Amongst the allegations: medical files just disappear from their system.
I guess CommInsure is in the business of making things disappear. Here is a photo of their twitter account (https://twitter.com/CommInsure)
Yeah - the Twitter account disappeared too. Looks like another cover-up albeit badly executed.
Maybe the Twitter account was never there - but searching @CommInsure on Twitter gives a fairly consistent history of reluctance to pay claims. This is an extract from the timeline well before the Four Corners episode.
The whole stream is littered with claims complaints. If the senior brass did not know this is wilful ignorance.
PS. All this is indicative of a "make the numbers or else" management style. Head office claims ignorance of what happens in the periphery even though it is obvious to those that look.
Head office also claims their mortgage underwriting is good. I suspect someone should actually go take a look. (But that is a story for future blog posts and future episodes of Four Corners.)
*For non-Australians think of the ABC as the Australian version of the BBC. You will not be far wrong.
Monday, March 7, 2016
A comment on negative gearing in the Australian property market
Background for non-Australians
In Australia you can deduct losses that you might make in renting a house against your ordinary (wages) income. This includes interest losses.
This is widely thought of as a tax incentive or even a tax rort. The aggregate amount of losses taken against tax is about 1% of GDP which is - to be blunt - a very large number. Negative gearing is widespread and part of our culture.
Moreover it is widely considered to be beneficial to have tax losses. I have had taxi drivers patiently explain that it is better not to pay principal on loans to buy investment properties (ie buy-to-let properties) because you want to keep the tax deductions as large as possible.
The Labor Party has promised to "abolish negative gearing". This has been a policy agenda for fringe groups (notably affordable housing activists) for some time.
Is negative gearing even a tax concession?
I sometimes express my view that negative gearing is not a tax concession and I am howled down by the consensus in this country. [This is despite doing an honours thesis on tax policy and working for five years in the Tax Policy Division of the Australian Treasury.]
But lets lay out the argument.
Imagine I have two business enterprises. One works well and the other one fails.
One makes $120. The other loses $100. My net gain is $20. If the tax rate is 30% I will pay $6 tax on on the net gain.
Now suppose that I can't deduct the losses against the profits. Then my loss will cost me $100. But my gain will be taxed at 30% and I will gain only $84 after tax. I will be $16 out of pocket.
If you do not allow losses to be taken against profits then you introduce an incentive against risk taking. Quarantining losses is expensive from a tax-policy perspective. Taken to its limit quarantining is a tax policy against innovation. [The benchmark for the taxation system is one that does not discriminate in taxation by how you make your income. Its a benchmark which implies tax policy should not in the benchmark case "pick winners".]
There is a case for quarantining losses - and it is done all over the place in tax policy - but almost everywhere the case for quarantining is anti-avoidance. The most famous example is that offshore losses tend to be quarantined against offshore income. The reasons are (a) the offshore losses are hard to audit and (b) the offshore income that it is quarantined against might not have hit the domestic tax base anyway.
Risks from not quarantining
If you do not quarantine losses you can wind up with completely anomalous situations. For example Australian once had a 150 percent R&D tax concession. If something were certified as R&D all inputs to the process were entitled to a 150 percent tax deduction. Then some enterprising minerals processing company did some tweaking of their processing technology. It was legitimate R&D whilst they were measuring the efficiency of their processes. All inputs to that process (ie the minerals they bought) were deductible at 150%. The output only taxable at 100 percent.
They bought say $10 million of minerals, processed them and sold $11 million worth of metals. But they got a net tax deduction of $4 million even though the activity was profitable and the real amount spent on R&D (ie the amount spent tweaking equipment) was tiny.
Done on this scale the concession could - and did - produce tax losses for the mining company in the hundreds of millions of dollars. There was almost no limit to how large the tax losses could be.
If these losses were not quarantined somehow they could erode the entire corporate tax base.
But the issue here was a "clever avoidance scheme", not that quarantining is of a benefit in itself.
And if you take the typical negative gearing case in Australia (a doctor or middle-income professional) buys a property and makes a real loss it is pretty hard to see how this is a "clever avoidance scheme". Its just a loss.
And real losses are normally deductible.
Countries that ban negative gearing
It is commonly asserted that other countries do not allow negative gearing - and that is true. In some countries capital income is always and everywhere quarantined from wages income. (Scandinavia is a key example where taxes on wages can be much higher than taxes on capital and quarantining is enforced against all businesses not just property investment.)
It seems the Australian Treasury agrees with my view that negative gearing is not a tax concession
The Australian Treasury (for foreigners the main economic policy advice department of the Australian Government) publishes a "Tax Expenditure Statement" which estimates how much various tax concessions cost on the basis that money spent via a tax expenditure is economically similar to money a government might spend directly if it taxed the income and then gave it back through grants or similar.
The tax expenditure statement gives a list of major tax concessions and lists two big housing related expenditures. First the imputed rent that you might receive owing your own house is not taxed even though it might conceptually be thought of as part of your income. Second the capital gains you might make selling your primary residence is not taxed (though it would be taxed if it were an investment property).
They do not list negative gearing as a tax expenditure. The list of big tax expenditures can be found on page 8 of the Tax Expenditure Statement.
But everyone thinks that negative gearing is a concession
Its pretty clear the view that negative gearing is not a tax concession is a minority view in Australia (though it is a view held fairly widely by senior tax people I have known and seems to be held by the Commonwealth Treasury).
The general consensus that negative gearing is a tax concession and that the smart money should and do take advantage of it.
And you find negative gearing all over the income spectrum including some high income earners (but very few mega-high income earners).
I find negative gearing intellectually amusing. It is not a tax concession but after much marketing by the Property Council, various spruikers and the otherwise ill informed negative gearing has been in part responsible for pushing house prices in Australia to ridiculous levels.
People will not only make investments when you give them a real tax concession - they will do so when they think they are getting a concession even if they are not. [We have likewise observed that it is easier to defraud people if they think they are getting a tax concession - witness forestry schemes in Australia.]
Implementing the Labor Party no-negative-gearing pledge
The Labor Party is careful not to ban negative gearing for existing property investments. If they did there would be squeals about retrospectivity. Also there would be dumping of property on the market by people who were no longer entitled to their tax concessions.
But they do plan to ban negative gearing prospectively. So I will throw up a simple example that shows the implementation difficulties.
Imagine a house that is positively geared. Rent is $800 a week and all outgoings are $700 a week.
But the tenant trashes it. (This happens, not often but it happens.) There is $10,000 worth of maintenance.
The landlord is out-of-pocket. Even after than $5000 net rent they collect in the year they are out of pocket.
Does the Labour Party have an argument for quarantining that loss that is not an argument for quarantining all business income against wages income? If so I have not heard it.
PS. I am not averse generally to the Scandinavian idea of income quarantining. However in that case all income from capital is separate for tax purposes from income from wages. I have not heard a good case for selective quarantining that is not an anti-avoidance case.
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.