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.

China and the shiny stuff

In my kleptocracy post I described how the range of investments available to the median Chinese family is limited. They can't take their money offshore (unless they are rich enough to afford casino junkets). The local stock market is rigged. There is no worthwhile mutual fund market. They can own see-through apartments. But their main saving mechanism is bank accounts and life insurance contracts (life insurance being a bank account proxy).

Rates are regulated - low. Inflation is high and ex-ante the return to Chinese savers is negative.

Despite negative real returns Chinese save in huge quantity. This may be because of the "four grandparent policy" as described in the kleptocracy post or because of gender imbalance (as described in the follow up post).

Whatever: in China we have huge quantities of savings at ex-ante negative real returns in some sense compelled by local social and political structures.

This pool of savings (part of what Ben Bernanke once described as the "excess of global savings") has global implications - and these will be explored in a forthcoming posts.

But here I state the obvious.

If you were forced to save huge amounts of money at negative real rates of return wouldn't gold look attractive?

There is no data I would trust on how much gold has been socked away by middle-income Chinese. Being a kleptocracy where government officials expropriate land, hydro dams and any other private assets they take a fancy to, the gold buried under the house is hardly going to be declared to official statistics collectors.

But it is there in some quantity.

Gold is a market I have studiously taken very little interest in. I agree with Warren Buffett - that it has no real return over very long periods and is thus unattractive. But in China no-real-return is a good return and until recently I had not thought about that clearly.

If people have a decent knowledge of the non-official gold-market in China please leave it (anonymously if you wish) in the comments.

Observations on gold demand in China now and in the future

I have no knowledge of the specifics of middle income people trading gold in China.

But I do note that inflation in China (with regulated low interest rates) is likely to be strongly positively correlated to gold demand in China.

Inflation in China is clearly declining right now (which is very bad for Chinese gold demand). However I do not think that falling inflation in China is likely to be sustained. Low inflation would result in the collapse of many State Owned Enterprises (and probably the regime) - and the regime is the hand that holds the printing press so to some extent inflation is a choice for the regime. They will print. And print. Their very lives depend on it.



John

Follow up to the China kleptocracy post

The China kleptocracy post has received a lot of comment - mostly favourable. It was my first post to get 100 thousand views. I would like to thank all that commented on it (especially Paul Krugman who was good for about 35 thousand page views).

Only a few of those views are from China. My post was blocked by the Great Chinese firewall.* That said, within China the people who have been in business there for more than a decade were mostly in agreement. The people who have been there a couple of years were less in agreement. Bill Bishop (who I read and respect) was in the less in agreement group.

I will not name the people in agreement because many have to live in China.

My thesis was

(a). The savings rate in China was abnormally high driven by the one-child policy,
(b). The options for investing those savings for most the population were extremely limited - mostly bank deposits.
(c). The bank deposit market was rigged so that deposit rates were consistently below the inflation rate.
(d). That repressed interest rates were mainly used to subsidize state owned enterprises and that
(e). This funded the widespread looting of State Owned Enterprises by party officials.

Demographics is outside my field of expertise and I received (and expected) most criticism on the demographic point. The first bit came from my business partner who thought that the high savings rate and the property boom came in part from the (extreme) gender imbalance in China. The gender imbalance is another artefact of the one-child policy - where selective abortion and infanticide produce a large shortage of female babies and (later) eligible women to marry. This drives male preening behaviour - and the most successful preening behaviour for a man is to be rich and to own property. This is an extension of the men-will-do-anything-for-sex argument - and in this case "anything" is own apartments and big (negative return) bank balances.

Unknown to me this was the subject of a serious academic paper by Shang-Jin Wei - a professor of finance and economics at Columbia University who supports the men-will-do-anything-for-sex argument with lots of fancy econometrics.

There was little objection to my argument about limited options for saving in China. That seemed self-evident - however those limited options are being undermined by capital flight. The Chinese are washing an incredible amount of money through Macau. That money is being saved outside the Chinese banking system - and is thus not subject to extreme financial repression.

There is also little objection to my suggestion that bank deposit rates are rigged below the inflation rate. China dropped the regulated bank deposit rate recently as the inflation rate declined. However - and it was the point of my post - negative real interest rates are declining in China because inflation is declining.

The fourth point - that the repressed interest rates are the main source of subsidy for Chinese State Owned Enterprises was backed up very strongly by Michael Pettis. There are other sources of subsidy. For instance tobacco is largely provided by a State Owned monopoly and tobacco use is not subject to much social sanction making the tobacco company unbelievably profitable (and hence able to pay very high salaries and benefits to senior staff). Indeed Michael Pettis points to a Mainland think-tank - Unirule which suggests that monopoly and direct subsidies have accounted for as much as 150 percent of the profitability of the State Owned Enterprises over the last decade. Pettis himself calculates that repressed interest rates may have accounted for another 400 to 500 percent of total profitability over this period.

Monopoly profits and financial repression are a subsidy from the household sector. Pettis thus states the obvious - five hundred to six hundred and fifty percent of SOE profits come from a subsidy from the household sector.

Absent subsidy the SOEs are staggeringly unprofitable. In a market economy a business that goes from making X per year to losing X per year usually fails or closes pretty quickly. A business that goes from making X per year to losing 5X per year crashes and burns very rapidly.

Absent the subsidies the whole SOE sector with its current expense base crashes and burns very quickly. By far the biggest subsidy is the subsidy of being allowed to borrow at repressed interest rates.

This of course leads to the fifth part of my argument. That was that the expense base of the SOEs was the (looted) income of Communist Party apparatchiks. Here surprisingly the New York Times came to my rescue with an article about the difficulty of economic reform in China. Reform in this article really meant reform of State Owned Enterprises. The difficulty was that:

Publicly controlled enterprises have become increasingly lucrative, generating wealth and privileges for hundreds of thousands of Communist Party members and their families.

That is - of course - precisely my point. And the Times goes on to say that the Government is moving to stifle debate on anything that challenges this status-quo.

Deflation of course will challenge the status-quo anyway. If 400-500 percent of the profitability of SOEs comes from financial repression then the end of financial repression will result in the collapse of the State Owned sector and the collapse of the wealth and privilege led by "hundreds of thousands of Communist Party members and their families". I suspect that the centre would find it increasingly hard to control their regional elites and the regional elites would revolt. [Revolution is almost always an affair of the second-tier elite versus the first-tier elite - the masses rarely drive it. This would be no exception.]

However in the face of that the centre would do anything to keep the inflation rate high. Ben Bernanke might not literally be prepared to throw dollars out of helicopters. The Central Committee - they might go there...



John

*I have been informed by someone that blogger is always blocked in China. The Chinese people who were telling me they can't get the blog usually get it via a virtual private network.