Tuesday, April 9, 2013
Once every few years I feel compelled to republish Alan Sokal
A link. Driven by a comment on a recent blog post.
http://www.physics.nyu.edu/sokal/transgress_v2/transgress_v2_singlefile.html
J
PS. For those who need an explanation of perhaps the funniest thing I have read in my life - a reasonable summary is here on Wikipedia.
Monday, April 8, 2013
Apology to CUPID PLC
Dear readers of my blog
Following correspondence received from Cupid plc's solicitors, I have removed recent blogs concerning Cupid from my website. I apologise for any factual inaccuracies contained within those blogs and I wish Cupid good fortune in its future endeavours.
John Hempton
JCPonderings
We must do something.
This is something.
Therefore we must do it.
http://jcponderings.weebly.com/
PS - The link to this article in Vogue is worth the price of admission ... http://www.vogue.com/vogue-daily/article/what-price-glory-jcpenney/#1
Saturday, April 6, 2013
The HP Board Changes
Over the years I have written to several companies (at least a dozen) to ask/query/complain or speculate about funky things in accounts. The reaction is often hostile and usually the more hostile and the less transparent the worse the situation is. Sometimes there is some smoke and some fire but not quite in the form I surmised. [This is a problem with misleading disclosure. When disclosure is misleading you can often accurately surmise things are not right and not as they seem and be totally wrong when you take a guess at the underlying reality...]
Wednesday, April 3, 2013
Cupid's profile count
This post has been removed an an apology can be found here.
I apologize to my readers for any inconvenience.
John
Tuesday, April 2, 2013
Cupid PLC's strange balance sheet
This post has been removed an an apology can be found here.
I apologize to my readers for any inconvenience.
John
Monday, April 1, 2013
Wondering whether the social sciences are forever stuffed
(Warning: this post is written after a glass or two of wine and is about the things that concern me after a glass or two of wine. It is not about investment.)
Brian Cox (read one of his books if you want some light amusement) pointed me (via Twitter) to this abominable article in the The Times Higher Education Supplement. It is quoting an Belfast Professor arguing for a "values based" higher education in the social sciences. To quote:
“At the back of all this is my vision for the public responsibility of social science: we’re about educating global citizens for the 21st century, not just factory-like graduates with their 2:1s,” Professor Brewer said. “It’s about inculcating within our students a set of values, an attitude towards others, that realises the public value.”The Professor (John Brewer) is aware of the obvious criticism... to quote the Times article...
Although he is well aware that many people would like to remove all talk of “values” from the social sciences, Professor Brewer said he sees himself instead in the tradition of 18th-century Scottish moralists such as Adam Smith and David Hume - “the cohort of people who gave us social science in the first place as it grew out of moral philosophy. They did not see any incompatibility between their practice as scientists and their argument that society was based on values.”Professor Brewer tells us that David Hume - of all people - did not see any incompatibility with his practice as scientists and his argument that society was based on values. Well - only if you ignore the fact that he wrestled with it extensively. This is probably the single most famous paragraph ever written by David Hume:
“In every system of morality, which I have hitherto met with, I have always remark’d, that the author proceeds for some time in the ordinary way of reasoning, and establishes the being of a God, or makes observations concerning human affairs; when of a sudden I am surpriz’d to find, that instead of the usual copulations of propositions, is, and is not, I meet with no proposition that is not connected with an ought, or an ought not. This change is imperceptible; but is, however, of the last consequence. For as this ought, or ought not, expresses some new relation or affirmation,’tis necessary that it shou’d be observ’d and explain’d; and at the same time that a reason should be given, for what seems altogether inconceivable, how this new relation can be a deduction from others, which are entirely different from it … [I] am persuaded, that a small attention [to this point] wou’d subvert all the vulgar systems of morality, and let us see, that the distinction of vice and virtue is not founded merely on the relations of objects, nor is perceiv’d by reason.”Hume here is quoted as "the distinction of vice and virtue is not founded merely on the relationship of objects, nor is it perceiv'd by reason".
Hume had plenty of ideas of where morality comes from but they were incompatible with the practice of a scientist no matter what John Brewer says.
John Brewer - and his attitudes - are precisely what make the social sciences useless. The social sciences can work on some entirely useful facts - and these facts can inform decision making independent of values. Try these for size for recent important arguments:
(a). Did Saddam Hussein in any way contribute to the 9/11 events.
(b). Does the Chinese political system preclude any deal including China on global warming? If so what deal?
(c). Would further regulation of semi-automatic weapons in the US actually reduce the chance of a Sandy Hook like event or are the guns irrevocably in circulation such that this regulation would not make people safer.
(d). Would a three trillion dollar expansion in the US Government debt funded entirely by expanding the balance sheet of the Federal Reserve increase inflation substantially? If so by how much?
(e). Would reducing the penalty for illegal drugs - especially cocaine - reduce violence in Mexico and ultimately would it reduce the illegal immigration pressure on the US-Mexico boarder?
All of these are questions that might concern social scientists (including economists) and in every case people who start with prior ideological commitment (an "ought statement") to one or other position disqualify themselves from the debate. If you don't start by thinking you might be wrong you are far more likely to be wrong. Being guided here by ideology (or the belief in God or John Brewer's values) will make you intellectually useless. Whether printing more money (d) increases inflation is a simple fact - and if you thought it did you might have made your bet and lost considerably...
But hey then - I should not be concerned about a(nother) generation of intellectually useless social scientists and mad classics professors coming out of the British schools. The people who think that Ernest Rutherford was not an intellectual make great trading counter-parties. The best people to trade against are people who do not devise tests for their ideas - whether the tests are as simple as chatting to a few Herbalife distributors or putting a profile up on a Cupid PLC owned dating site.
So - selfishly - I want to wish John Brewer and his ilk the best at destroying the minds of a generation. I only wish he taught at Oxbridge or Harvard (not some Belfast school) as it seems to be Oxbridge and Harvard types I trade against.
John
Thursday, March 28, 2013
Alliance Resources - prices received for coal over time
Alliance Resources has - as my posts have shown - pretty ordinary operating metrics but exceptional financial metrics. Labor productivity is low and falling - profit is high and rising.
However the price they receive is now rising and well above spot.
In particular ARLP is now obtaining about $8 of premium per ton for their coal over Illinois Mid Sulfur coal. Whilst Bloomberg no longer have a price series for Illinois Basin high sulfur coal my contacts (and comparison with Arch Coal) say that ARLP coal instead of trading at an $8 premium it should trade at a $3.50 discount.
This price comparison has quite strong backing. Here is the price disclosure from the last Arch Coal annual:
If prices were reset to market (that is $10-11.50 lower) then the ability of this MLP to make distributions goes away. Indeed it is hard to see how they pay their debts. Bankruptcy is the likely outcome. If the prices go towards the $42.33 that Arch Coal is contracted to (in 2014) for Illinois Basin coal then Alliance debt holders will wind up extremely short.
Without these high prices Alliance would look like another very stretched coal mine with mediocre operating performance - but with a lot of debt - and it will probably go bankrupt.
The stunning performance of Alliance is a little from under-reserving workers compensation but mainly because the management team have extracted contract prices massively better than the competition... this is a company where the successes have been by senior management and white collar employees (those who sell the coal) rather than the workers who mine it.
The chart itself suggests the explanation: the prices in the contract look like they are regularly escalating. They were way below market for a while and are now a fair bit above market. It looks like the company entered some escalating price contract when its bargaining power was very strong.
My first take: the contracts will adjust
This is what the last 10-K said about contract resets:
Virtually all of our long-term contracts are subject to price adjustment provisions, which permit an increase or decrease periodically in the contract price to reflect changes in specified price indices or items such as taxes, royalties or actual production costs. These provisions, however, may not assure that the contract price will reflect every change in production or other costs. Failure of the parties to agree on a price pursuant to an adjustment or a reopener provision can, in some instances, lead to early termination of a contract. Some of the long-term contracts also permit the contract to be reopened for renegotiation of terms and conditions other than pricing terms, and where a mutually acceptable agreement on terms and conditions cannot be concluded, either party may have the option to terminate the contract.These are not reset to spot prices. These are reset in prices due to changes in operating costs and the like. Still resetting of the prices for this company to anything akin to market means likely bankruptcy - so the contract resetting terms are critical.
I figured that I have to look at more detail at the contract terms, price and volumes.
And what I found made left me with a few options - all ugly.
The mathematics of Alliance contract terms...
Unfortunately, you are going to have to bear with me through a little bit of arithmetic.
In 2010, approximately 92.4% and 89.0% of our sales tonnage and total coal sales, respectively, were sold under long-term contracts (contracts having a term of one year or greater) with committed term expirations ranging from 2011 to 2016. As of January 28, 2011, our nominal commitment under long-term contracts was approximately 31.1 million tons in 2011, 27.3 million tons in 2012, 24.1 million tons in 2013 and 19.0 million tons in 2014.
In 2011, approximately 92.2% and 90.5% of our sales tonnage and total coal sales, respectively, were sold under long-term contracts (contracts having a term of one year or greater) with committed term expirations ranging from 2012 to 2016. As of January 28, 2012, our nominal commitment under long-term contracts was approximately 33.8 million tons in 2012, 33.5 million tons in 2013, 27.2 million tons in 2014 and 19.8 million tons in 2015.
In 2012, approximately 94.2% and 94.3% of our sales tonnage and total coal sales, respectively, were sold under long-term contracts (contracts having a term of one year or greater) with committed term expirations ranging from 2013 to 2020. As of January 28, 2013, our nominal commitment under long-term contracts was approximately 38.5 million tons in 2013, 30.7 million tons in 2014, 23.4 million tons in 2015 and 18.7 million tons in 2016.
Just can also work out the size of the incremental contracts sold in each year. This is in the following table.
We reported Net Income of ARLP of $192.2 million, an increase of 43.2% in 2009 compared to Net Income of ARLP of $134.2 million in 2008. The increase of $58.0 million was principally due to improved contract pricing resulting in an average coal sales price of $46.60 per ton sold, compared to $40.23 per ton sold in 2008, partially offset by lower sales volumes and higher operating expense per ton sold in 2009.
We reported record Net Income of ARLP of $321.0 million in 2010 compared to $192.2 million in 2009. This increase of $128.8 million was principally due to increased tons sold and improved contract pricing resulting in an average coal sales price of $51.21 per ton sold, as compared to $46.60 per ton sold in 2009.
We reported record Net Income of ARLP of $389.4 million in 2011 compared to $321.0 million in 2010. This increase of $68.4 million was principally due to increased tons sold and improved contract pricing resulting in an average coal sales price of $55.95 per ton sold, as compared to $51.21 per ton sold in 2010.
A higher average coal sales price in 2012, which increased to $56.28 per ton sold as compared to $55.95 per ton sold in 2011, resulted from improved contract pricing for Illinois Basin coal sales offset partially by lower coal volumes sold by our Mettiki mine into the metallurgical export markets.
Explanation (a) large escalation clauses - is consistent with the price chart above. Alliance sold at prices well below market in 2008 and sells well above market now. However (a) has a very big problem. This is that none of the 10-Ks tell us about a coal price escalation clause. And the management team are promotional and would normally tell us.
Explanation (b) thus looks more plausible... The prices received are an artifact of cancelling old contracts set at higher prices. That would also explain why the company has failed to deliver its contracted tonnage in every year studied. In that case the new tons must be at much lower prices.
We get some guidance in this matter from the accounts of the two largest customers - the Tennessee Valley Authority and LG&E (the large German owned utility). Both these companies suggest that they have derivative liabilities on coal contracts - that is they are contracted to buy coal at above market prices. However in both cases the derivative liabilities are falling fast (consistent with explanation b above).
The disclosure from the TVA is most germane:
At September 2012 The Tennessee Valley Authority had 46 million tons contracted and they were $267 million underwater on those tons. In other words their coal was $5.80 per ton overpriced.
By December they had 48 million tons contracted but were only $224 million underwater - or $4.67 a ton underwater.
At this rate by early 2014 The TVA will have rid itself of all out-of-the-money contracts. They may be doing it this fast by paying their way out. Whatever happens Alliance Resources (whose biggest customer is The TVA) will be receiving closer to market prices.
Future outcomes
Monday, March 25, 2013
Vodafone news of the day
By Kate Holton, Chris Vellacott and Sinead Carew
(Reuters) - Almost five years after taking the helm at the world's second-largest mobile phone company, Vittorio Colao doesn't want to be the third Vodafone boss to be stumped by its seemingly intractable U.S. 'problem'.
The urbane Italian, who has streamlined a company built on the foundations of aggressive expansion, is exploring what to do with the one remaining asset he does not control - the stake in U.S. operator Verizon Wireless, which makes up about 75 percent of the firm's value.
On paper Colao has several options, each with pros and cons: sell all or part of the stake to majority owner Verizon Communications, maintain the status quo in the face of Verizon's desire for a deal, or sell Vodafone in its entirety to Verizon.I desire problems like Vodafone's intractable "US problem".
The US problem is that they own - but do not control - an asset that has appreciated, appreciated some more and gone up a bit after that.
Most of Vodafone's shareholders would love to have that problem because Vodafone has fallen a bit, got a little depressed, then gone into a decline and - well - recovered somewhat in recent years because it got just too cheap. And it had distributions from its US operation to fund its dividend. If Vodafone did not have its US problem its stock price might resemble France Telecom by now...
But with an asking price for Vodafone's 45 percent stake in Verizon Wireless around $115 billion and a potential $20 billion tax bill on the capital gain, Vodafone investors worry that Verizon may not be willing to pay enough for a business it already controls.No. What Vodafone investors are scared of is that Vodafone will sell its best asset grotesquely tax-inefficiently to buy inferior assets at prices two turns higher.
The inability to do that so far has been the US problem in a nutshell. The US problem is the only thing that has saved the shareholders here.
Verizon has one huge advantage in this deal. They are dealing with self-centered imbeciles rather than shareholder focused players. Later in the article they say:
Vodafone has lawyers from Linklaters, bankers from UBS and consultants from McKinsey looking at deal options and structure, and for ways to reduce the tax bill, according to three people familiar with the situation.You bet they are. But as an American analyst points out:
It is not clear how a large proportion of any capital gains tax liability could be mitigated while allowing Vodafone to make a clean break from US. Even if a feasible solution could be found we disagree with the bull-case view that any point of tax law would be clear cut. In our view, Vodafone could face protracted debate with tax authorities, something we believe it wants to avoid.But even this analyst is not correct. What our "urbane Italian" wants is to avoid isn't difficulties with the IRS. It is being shafted when he sells the business which belongs to shareholders (including my clients).
Personal concerns for employment for Vodafone's board and management - not tax - is the issue here.
In praise of unjust enrichment
The only deal that makes sense is to sell the whole of Vodafone to Verizon.
That is obvious.
The main people it does not make sense to are the Vodafone senior management.
So I will suggest a solution for Mr Colao.
The deal should be done with termination payments - huge ones - maybe a cumulative half a billion dollars.
So much so that the "urbane Italian" and his ilk have enough money to be pointlessly urbane for the rest of eternity.
Enough money so their heirs and successors can be dynastically "urbane" as well.
It will be unjust.
It will be a reward for a decade of failure.
But as a shareholder I would vote for it. These clowns are so bad it might be worth half a billion dollars to make them go away.
Still if Verizon want to save that half a billion dollars (and then some) they can force the issue. Go hostile. Go now. Go hard.
Go before Vodafail's startlingly inept management work out just how much the Square Mile really hates them.
John
Saturday, March 23, 2013
Gonorrhoea, online dating and credit card phising scams – examining Cupid PLC
I apologize to my readers for any inconvenience.
John
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.