Scratch Notes

DISCLAIMER: The views and information I provide are for informational purposes only; are not meant as investment advice; are subject to change without notice of any kind; do not constitute an offer of products or services with regard to any fund, investment scheme, or pooled investment; nor do they in any way, shape or form represent the views of my employer.

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May 7, 2016

New Lands’ End CEO Delivers High Fashion – and a Culture Clash (WSJ 5.6.16)

  • CEO Federica Marchionni started in February 2015
  • CEO spends one week a month in Dodgeville, WI headquarters; balance of time in NYC
  • Former Ferrari and Dolce & Gabbana executive, she believes the Company’s boxy sweaters and baggy pants are “ugly”
  • LE now running ads in Vogue and other fashion mags, eschewing down home roots
  • Second CEO since 2014 spin

“Ms. Marchionni hobnobs with celebrities and had Lands’ End sponsor Vanity Fair’s lavish Super Bowl party in February. She had private bathrooms installed in both of her offices, something unheard of in the company’s history. “Lands’ End executives didn’t have private bathrooms,” said Stan Tymorek, a former longtime employee.”



Retailing Comps

Lands EndLL BeanJ CrewJCP

Hulu Bets on Cable-Style Web TV (WSJ 5.2.16)

  • Targeting 1Q17 for launch of IP pay-TV service
  • DIS and FOXA close to agreements to licenses channels to the service
  • ABC, ESPN and Disney channels from DIS; and Fox broadcast network, Fox News, FX and national/regional sports channels from FOXA
  • Comcast is a silent owner (condition of the 2011 consolidation from GE) via NBCUniversal, and has not yet agreed to license its channels to the service
  • Hulu subs >10 million
  • Service likely costs circa $40/month
  • PlayStation Vue starts at $30 to $40 a month; Sling TV at $20

“Apple, which was seeking to launch such a service last year, has been frustrated in its efforts to license programming from big media companies at rates that would allow it to keep retail prices attractive to cord-cutters, media executives have said.”

How Tom Wheeler Made Cable King (WSJ 4.29.16)

  • In the freewheeling days of the Internet, “The deal that actually happened depended on whose interests were most served by the interconnection.”
  • The old market now superseded by: “…the one-way video deluge, federal regulation, and because it doesn’t suit Netflix.”
  • Washington blocked the Comcast/Time Warner deal because it did not suit Netflix; but approved the Charter/Time Warner/Bright House deal because it does suit Netflix.
  • CHTR deal conditions: no usage-based pricing or interconnection fees for seven years; a ‘refrain’ from bargaining for exclusive content in a Netflix-unfriendly way; and overbuilding

“Making the Obama FCC’s regulatory obsessions seem ludicrously backward-looking and clueless, 5G wireless is coming along: In a few years, Americans are likely to have multiple carriers offering them cable-like speeds, at home and on-the-go, as well as competitive packages of content if bundled content continues to have appeal for customers and providers (as we suspect it will).”

Twitter Notes

Big but brittle (Economist 5.7.16)

Edgewell Personal Care Could Have 40% Upside (Barron’s 5.7.16)

Seagate: Down 40%, With No Clear Path In Sight (Barron’s 5.7.16)

Wells Fargo 1Q16 Call: Energy Thoughts (17 Mile 5.3.16)

Fiat Chrysler Thesis (Graham & Doddsville Spring 2016)

Amazon shines in turbulent week for tech giants (FT 4.29.16)

J.C. Penney Could Double (Barron’s 4.30.16)

Oil Patch Relieved by Price Rebound (WSJ 4.29.16)

Central Bank Insanity (17 Mile 4.26.16)

There’s no stopping the US junk bond train – for now (FT 4.22.16)

Bank of America: The limits of fasting (Economist 4.21.16)

China’s economy: Romance of the three quarters (Economist 4.21.16)

Oil markets: Drill will (Economist 4.21.16)

Oil bulls will be the losers as technology upends demand (FT 4.18.16)

April 17, 2016

The following links are to notes taken on articles via Twitter.

Inside the Fall of SunEdison (WSJ 4.14.16)

Facebook and Google: The $230 Billion Question (WSJ 4.12.16)

YouTube music terms put labels in a spin (FT 4.10.16)

European TMT consolidation (two articles)

China tech: Renminbi to burn (FT 4.10.16)

The new face of Facebook: How to win friends and influence (Economist 4.9.16)

At Owens-Illinois, the Glass Is Half-Full (Barron’s 4.9.16)

April 3, 2016

Oil and gas: debt fears flare up (FT 3.21.16)

  • Flatbed truck for hauling drilling rigs sold for $65K at a recent auction, versus original cost of $400K
  • Eagle Ford rigs dropped from 214 to 37
  • ‘Mom and pop’ service cos trying to offload equipment
  • From 2006 to 2014 global O&G debt rose from $1.1 to $3 trillion
  • From 2004 to 2013 capex of the top-18 producers rose from $90B to $356B
  • From 2010 to 2015 US production rose by 4MM BPD
  • Petrobras has maturities of $23B in 2016-2017

Ackman Tries to Calm Investors on Valeant (WSJ 3.23.16)

  • Pershing down 47% from August 2015 high; 26% YTD in 2016
  • Ackman told Pershing investors that he knew how to fix Valeant; joined the board himself; and attended board meetings over the weekend
  • Permanent capital of $12B AUM:
    • $4B from publicly-traded entity
    • $1B employee capital
    • $1B bond offering
  • Roughly 6.25% of total AUM can be withdrawn per quarter
  • Pershing Square launched in 2004, and Pershing Square Holdings launched in 2012

More Ackman History

Gotham Partners Is Snared By a Still-Murky Sand Trap (WSJ 1.8.03)

If at first you don’t succeed, start another fund (Reuters 10.14.10)

Taking aim at Target (Fortune 3.28.09)

17M: The investment world is really one enormous peanut gallery – those with limited documented success love to criticize those willing to put on public display their abilities, process and performance. And in my opinion, Ackman receives more than his fair share of criticism, even adjusted for his outrageous arrogance. I would bet big $$$ that if the spotlight was put on Buffett and Munger back in the 60’s and 70’s that the headlines would not be materially different than those tied to Ackman. Highly concentrated bets, ‘shady’ insider activity, big temporary losses? Welcome to Berkshire, Sanborn Maps, Blue Chip Stamps, Washington Post, etc, etc.

Of course, by putting himself out so publicly Ackman must be able to withstand public criticism. But the grave stomping by those with zero public skin in the game is bordering on the absurd.

Sports-TV Boom Under Pressure (WSJ 3.28.16)

  • RSNs $/sub/month cost to PTV
    • YES (Fox): $5.36
    • SportsNet LA (LA Dodgers): $4.59
    • Fox Sports Detroit (Fox): $4.25
    • New England Sports Network (Comcast): $4.12
    • SportsNet Philadelphia (Comcast): $4.12
  • DTV claims more than 50% of the TV homes in the LA market do not carry the Dodgers’ SportsNet LA channel
  • The Cubs originally planned to launch an RSN in 2019, but are leery of doing so given ‘what’s going on in the cable universe’
  • YES, home to almost 1 million HHs via Comcast is seeking to increase its fee to $6 from $5.36
  • Comcast owns stakes in eight local sports channels
  • In 2012 Fox signed a 30-year deal for $1.5 YES; and in 2014 it increased its 49% stake to 80%
  • According to Nielsen, Yankees games on YES averaged 250,000 viewers versus 450,000 in 2007

April 1, 2016

China’s future challenge for the world economy (FT 3.30.16)

“India’s latest Economic Survey provides a thought-provoking taxonomy of crises. The external impact of a crisis depends, it argues, on whether it occurs in systemically important countries, it is the result of fiscal or private borrowing and whether currencies of affected countries appreciate or depreciate.

“What might this analysis have to do with China? The answer is that it is a systemically important country that suffers from high and rapidly rising corporate indebtedness. This might lead to a sudden halt in investment and a rapid depreciation.”

  • 45% investment rate (as % of GDP) no longer makes sense in a sub-7% GDP world
  • The private sector is responsible for 2/3 of investment, thus is vulnerable to market forces

“The world economy is in no position to absorb another big deflationary shock. The possibility of such a shock from China over the next several years is real. But a longer-term issue also arises: how to integrate China into the global financial system.

“Experience suggests that simultaneous liberalisation and opening up of fragile financial systems often ends in vast crises. If the country concerned is systemically important, such crises will be global. Floating exchange rates may weaken the impact. Even so, a crisis in a systemically important economy will have huge effects.”

  • China’s gross annual savings were $5.2 trillion in 2015 ($3.4 in the US, for reference)
  • ‘Broad money’ was $15.3 trillion, and total gross credit was $30
  • This stock of savings is underpinned by only $3.2 trillion of forex reserves
  • Portfolio diversification and capital flight could quickly overwhelm these reserves

“In her speech at the China Development Forum this month, Christine Lagarde, managing director of the International Monetary Fund, noted rightly that “increased global integration brings with it greater potential for spillovers — through trade, finance or confidence effects. As integration continues, effective co-operation is critical to the functioning of the international monetary system. This requires collective action from all countries.” Right now, nothing is more important than the co-operative management of the immediate stresses in the Chinese economy and the longer-term challenges of China’s financial integration.

“If either were to be mishandled, it could put unbearable pressure upon our integrated global economic system. The world economy is still struggling to handle the aftermath of the western financial crises. It might fail to cope with a Chinese one altogether. The last time a hegemonic financial power emerged, the world suffered the Great Depression. It has to do better this time.”

March 20, 2016

U.S. Coal Sector Faces Reckoning (WSJ 3.17.16)

  • American coal producers: Peabody Energy Arch Coal, Alpha Natural Resources, Patriot Coal, Walter Energy
  • 2016 first year gas electricity generation (33%) greater than coal (32%)
  • Coal generated 50% in 2008
  • Coal prices down 62% since 2011; 18% LTM
  • Peabody total debt $6.3 billion; operates 26 mines in US and Australia
  • Peabody paid $5.1 billion for Macarthur Coal in 2011
  • EPA estimates 802 million short tons of coal will be burned in US in 2050, down from 900 in 2015

March 16, 2016

China’s Looming Currency Crisis (WSJ 3.16.16)

  • Chinese lending rose by 67% in January
  • Iron ore prices rose 64%, while the Yuan gained back ‘half of the nearly 7% it had lost…since November’.
  • $800 billion of credit was pushed into the economy in January
  • Producer prices dropped 5.1% from Jan to Feb
  • PMI fell from 48.4 in Jan to 48 in Feb

“From hiding capital outflows to propping up real-estate values, manipulating futures markets and squeezing short-sellers of the yuan, Chinese authorities have been trying to bring back the old, quasisuperstitious belief in Beijing’s omnipotence. But the political desperation behind these efforts betrays a different story: that an impending currency crisis is a signal of the dream’s undoing.

“That’s why in China getting money out of the country is now the major preoccupation of both families and corporations. Risk-averse individuals are trading out of the wealth-management products they used to buy for 10% yields and moving their money to safety in the U.S., Australia, Canada and Europe. Chinese companies are making extravagant bids for overseas assets such as General Electric’s appliance division, the equipment maker Terex Corp., the near-dead Norwegian web browser Opera, the Swiss pesticides group Syngenta, technology distributor Ingram Micro and even the Chicago Stock Exchange.”

  • Price/income ratios in China are ‘generally over 20’ versus ~3 in the US
  • A 15% depreciation would bring the Yuan back to pre-GFC levels

Many Shale Companies Are Unable to Ramp Up Oil Output (WSJ 3.15.16)

  • Too many workers let go, and too much equipment idled for drilling to quickly ramp back up
  • More than three dozen US O&G operators plan to cut 2016 capex by almost 50%
  • Close to 60% of the fracking equipment in the US has been idled (17M: WOW)
  • “…even if prices return to levels where shale drillers can make money again, many companies are vowing to be cautious. Some are tempered by what occurred last spring, when producers jumped back into drilling new wells after oil prices briefly hit $60 a barrel, inadvertently worsening a supply glut that ultimately made prices worse.”
  • The Bakken shale region will need $60+ for three months for drilling to pick back up
  • DUC wells could ‘churn out’ 620 KBD for six months if all brought back online at once
  • According to a survey, approximately 72% of laid-off O&G workers are looking for jobs in other industries (17M: WOW)

17M: Jeff Ubben discussed something similar the other day, saying that the US shale services employee base has been gutted to the point that companies will simply be unable to bring drilling back online in a timely fashion.

I think it is safe to say some pretty powerful seeds are being sown for an upside oil price problem over the next couple of years. The market, rather efficiently, has taken care of the excess supply over the last 18 months; and now it is starting to reverse. You can see this in the price action of oil, where it is beginning to refuse to decline on bad inventory news, if not actually rise.

March 14, 2016

How Google Could Put Pay-TV in a Box (WSJ 3.14.16)

  • Under proposed FCC rules, consumers could view content using devices, apps or software made by others, including Google or TiVo
  • $20B in set top box rental fees at risk
  • Tech companies see TV advertising as the ‘next frontier’
  • FCC wants cable to make three ‘flows’ of information available: video programming, information about what content is available to a consumer, and what a device is permitted to do with the content, such as record
  • The above stands in contrast to the app-based model PTV providers are pushing

17M: Once DVR moves to the cloud, this appears to be a natural evolution of the PTV ecosystem. My guess is PTV providers will find a way to make up for the loss of rental fees, but need to think thru the various revenue streams a bit more.

March 13, 2016

A structural shift? (FT Big Read 3.3.16)

  • South Carolina Port Authority reports that container traffic down 5% YOY in January 2016
  • China, commodities and Emerging Markets primarily to blame…
  • …But, economists believe global ‘digitalization’ is beginning to overturn the old order of ‘physical’ globalization
  • Finance, goods and services comprised 53% of world output in 2007; down to 39% in 2014
  • In 2016, companies and individuals will send 20 times more data around the globe than in 2008
  • GE’s use of 3D printers to make fuel nozzles for jet engines a good example: rather than a company receiving a physical container of goods, a ‘digital set of orders’ will be sent to a 3D printer
  • There has also been a ‘shortening’ of global supply chains, with big companies gobbling up intermediate production that otherwise would travel thru global trade routes
  • Global consumption of finished products such as cars and pharmaceuticals has outpaced trade growth in those goods

March 3, 2016

Walgreens sits at the centre of three healthcare storms (FT 3.1.16)

  • Walgreens largest US pharmacy with more than 8,000 outlets
  • Accounts for 1/3 of the market, worth $216 billion
  • Closed merger with UK chemist Alliance Boots
  • Proposed to buy Rite Aid for $9.4 billion last October

FCC Probes Cable Firms’ Influence on Web TV (WSJ 2.29.16)

  • To-date, traditional TV channels have not been rolled out via the Internet in a big way
  • At issue are the contracts that programmers sign with distributors, which bar programmers from simultaneously providing programs to an online provider
  • In some cases, the contracts simply reduce the price the cable firms must pay for the programs if they are also available online
  • FCC may approve the CHTR/TWC deal with a condition that limits the use of these clauses
  • CHTR argues that these clauses are not specific to the merger; and if addressed, should be addressed on an industry-wide basis

17M: Why should cable cos have to pay for content that can be viewed elsewhere? After years of double-digit price increases – which in turn drove up the cost of payTV, and thus drove the ‘cord cutting’ wave – it appears the programmers want their cake and to eat it too. But WTF do I know.

February 23, 2016

China’s world of debt (FT 2.12.16)

  • ChemChina offering $44B to purchase Syngenta, the Swiss agrichemical giant
    • ChemChina’s leverage is 9.5 times EBITDA, putting it into the ‘highly leveraged’ category according to S&P
  • Median leverage of the 54 Chinese companies that publich financial figures and did deals overseas last year is 5.4 times
  • China invested $110 billion overseas in 2015, up 16% YOY
    • M&A accounted for $60.8B
    • 2016E M&A $97B
  • China projected to spend over $1 trillion overseas in the next five years
  • “These companies are not viable without state funding. Can they possibly be good owners for these companies they are acquiring? I think that is something the regulators are looking at.”
  • ChemChina
    • China’s largest chemical company
    • Revenue $45 billion
    • Ranked 265 on Fortune Global 500 list
    • Employs 140K, 2/3 of which are in China
  • For the Syngenta deal, ChemChina received $30B from China’s Citic Securities and $20B from HSBC
  • The U.S. Committee on Foreign Investment blocked the $3.1 billion sale of Philips’ lighting unit to a Chinese consortium

Cheniere’s Gas Hits Tough Market (WSJ 2.18.16)

  • Price of LNG has dropped 50% YOY in Asia, the world’s ‘largest and traditionally most lucrative market for LNG’.
  • South America the most likely destination for Gulf Coast gas set to begin shipping soon
  • Icahn owns 13.8% of the Company
  • Demand for North American LNG 6.5 BCF for the next eight years, according to Canadian bank CIBC
  • Cheniere has 6.3B approved from a pair of export terminals
  • Asian LNG spot has dropped to less than $7
  • Cheniere assumed a $3.25 margin as of December; now down to $2
  • BG Group and Total have signed on for 20 years
  • Expects at least 5 ‘trains’ at Sabine Pass; upwards of 5 at Corpus Christi
    • Expects to spend $18B at Sabine, and $16B at Corpus

Big Media’s Fortunes Wane as Cable Operators Prosper (WSJ 2.17.16)

  • A year ago, big media cos traded at 10.4 times EBITDA…this has now fallen to 8.1 times
  • Cable cos currently trade for approximately 8.4 times
  • Sentiment is now that media content is so fragmented that you can get it anywhere; but it’s broadband that connects it all
  • Cable cos can steal share from DBS and telcos; but media companies require growth in the overall payTV system
  • MoffettNathanson estimates total US PTV subs are contracting at a rate of 1% per annum
    • 17M: Is this not a poor way to measure the overall system? What about OTT viewership in additional PTV viewership?

Media Stocks: TV Advertising’s Death Is Greatly Exaggerated (WSJ 2.17.16)

  • Owners of national TV properties likely grew ad revenue by 6-7% in 4Q15 and 1-2% in 2015, according to Pivotal Research
  • Stripping out Olympics and political ads, total ads grew 2-3% in 2015

February 15, 2016

Google I/O 2015 – Helping Moonshots Survive Contact with the Real World

  • Google X not a: research center, incubator (sort of, not really), Google biz unit
  • Google X is taking ‘moonshots’
  • Trying to build a moonshot factory
  • Moonshots aspire to make the world 10 times better…not 10 percent better. Big risks taken for potential big long-term reward.
  • ‘Factory’ serves to remind that Google X is building products with real life applications
  • Frustrating game of ‘not it’ re moonshots
    • Small companies avoid taking moonshots because it costs too much (better for bigs)
    • Big companies avoid taking moonshots because too risky for a ‘mature’ company profile (better for smalls)
    • Government used to take moonshots, but not their thing anymore
    • Academics write about moonshots, oftentimes producing science that underlies future moonshots, but not system builders
  • We can all work on moonshots – it’s a mindset re making things ’10 times better’
  • Having the appropriate mindset can literally make things easier because to solve a HUGE PROBLEM you need to start from zero
  • Moonshot blue print – intersection of: Breakthrough Technology —> Huge Problem <— Radical Solution
  • Huge problems: 1.2 million people die in car accidents every year; $1+ trillion wasted every year with people sitting in traffic
  • Key operating principle is to get in contact with the real world as fast as possible
    • Cannot possibly know at the beginning the ‘right’ thing to do; but you can have a process where you discovery faster, rather than slower, that you’re on the wrong track
    • As discouraging as it is to discover that you’re wrong, the faster it happens the better it is in the long run (obviously)
  • Project Wing
    • Goal: Self-flying vehicles for delivery
    • Significant amount of friction in how things are moved around the world
    • Could save 20,000 lives a year in the US if shave 5 minutes off the average time it takes to get a defibrillator
  • Project Loon
    • Goal: Beam internet down to the 4 billion people without access
    • Most people have the device, but no access
    • Design balloons to hang in the air acting as mini cell towers
  • Self-Driving Cars
    • Cannot rely on humans as back-ups
    • The car has to be able to go from point A to point B on its own (2.5 years ago from this video)
    • Now drive 10,000 miles a week in Mountain View

February 7, 2016

U.S. Hedge Funds Bet Against China (WSJ 2.1.16)

  • Kyle Bass apparently has 85% of his firm’s capital tied up in a bet against the Yuan
    • 17M: This figure is getting a lot of press, but my guess is it is structure as such that the exposure is not all that close to a straight 85%
  • Bass believes the opportunity is “orders of magnitude…larger than the subprime crisis”.
  • This is quickly becoming the hedge fund trade de jour, with Bass joining Druckenmiller, Tepper, Einhorn, Ackman, and I assume Loeb in the trade
  • Chinese forex reserves total $3 trillion, but investors and residents are pulling capital out of the country at an increasing pace, which is the crux of the Short Yuan thesis
  • Bass believes the Chinese will need to bail out its banking system, and that the currency will depreciate akin to the supposed depreciation in the USD after the Fed bailed out the US banking system
    • 17M: This thesis point makes little sense, as the USD sky rocketed leading up to Lehman Brothers in late 2008, and its fall was relatively muted in following years. Perhaps the Yuan will depreciate, but this is a terrible analogy.

17M: I did not invest thru the subprime-led lead-up to the GFC, so perhaps a widely telegraphed trade such as the Short Yuan trade could still work in a big way; but something tells me the Short Yuan trade will be more along the lines of the Short Yen trade of 2012-2015. Once the Short Yen trade was out of the bag in early 2013, half of the move from 80 to 125 was over.

I agree with Bass that simply because a few big hedge funds have the same trade on does not mean the trade is ‘crowded’. But China has been in the headlines for years, and thus I believe there is an above-average chance that a lot of the bad news is priced into its currency. Yes of course it could continue depreciating…but really, the guy that was predicting an utter implosion in the Japanese currency and interest rate markets is correct that this is ‘orders of magnitude’ larger than the greatest financial crisis since the Great Depression?

My man Michael Hasentab has a team on the ground in China at all times, and he is and has been far more positive on the long-term outlook for China than the doomsayers for years now. His July 2015 presentation on China provides a good overview of the transition that China is undergoing.

Time Warner-Hulu Talks Heat Up (WSJ 2.1.16)

  • TWX in talks to acquire a 25% stake in Hulu since late 2015
  • Hulu currently owned by DIS, FOXA and CMCSA
  • Hulu allows subs to view current seasons (typically after the first episode has aired), whereas AMZN and NFLX only allow viewing after a season is over
  • TWX believes current seasons available outside the payTV system is harmful to content economics because it facilitates ‘cord-cutting’
  • Hulu has about 10 million US subs versus 45 million for NFLX

Apple tries to change how core business is seen (FT 1.28.16)

  • In the last quarter 1 billion Apple devices were in active use – including iPhones, Watches and Macs
  • Installed base related purchases grew 23% to $31.2B
    • First disclosed in the latest quarter, some believe this metric was used to obfuscate softening iPhone momentum
  • iPhone made up 68% of sales in the latest quarter; while Services only 7%
  • Due to multiple devices per user, Apple’s ‘active user base’ is not comparable to Google’s or Facebook’s
    • Apple’s ‘unique user base’ likely around 600 million

17M: I have long despised the *ex cash Apple trades for a ‘below market multiple’* bull case on Apple, as nobody in their right mind can come within a mile of predicting what Apple will look like in 10 years. What I can get on board with is that Apple should not be treated as a hardware company, and thus should trade at a higher-than-hardware multiple…just not on current earnings power.

No question Apple has an enormously sticky user base with a wide and growing moat. While dangerous to use personal anecdotes, I can certainly attest to its width, as it will be years until anything breaks into my family’s Apple network. And again using my own experience, the more music and television services Apple layers onto its network, the far less likely it is that anything breaks into my personal technology network in the near future.

The million dollar question is two-fold: 1) will consumers view and pay for the iPhone – the center of the Apple network effect – as a ‘Software as a Service’, and 2) how much will they pay for it over time? Will Apple always sell its hardware thru the telcos? Will Big Tech and Telcos eventually merge in some fashion, rendering the distinction moot? I have no clue – I just know that technology is changing fast, and technology drives cost down over time. As such, it is almost inevitable Apple’s profitability will decline over time.

Offsetting factors to this relatively pessimistic view of Apple’s profitability is the potential for Apple to use its cash flow – both on balance sheet and future generation – to purchase and create alternative revenue streams on top of its existing network.

January 11, 2016

Saudi Aramco Timeline (FT 1.11.16)

  • 1933: Saudi Arabia allows Standard Oil of California (Socal) to search for oil
  • 1938: Oil discovered after five years
  • 1939: Saudi Arabia exports crude for the first time on a tanker holding less than 1/20th of the load of today’s vessels
  • 1944: The California Arabian Standard Oil Company, a Socal subsidiary, changes its name to the Arabian American Oil Co, or Aramco
  • 1950s: Oil production doubles over the decade to exceed 1MM bpd
  • 1960: The Opec oil cartel is formed
  • 1970s: The Saudi government starts building a stake in Aramco before taking full control in 1980
  • 1988: Arabian American Oil becomes Saudi Aramco
  • 2009: An expansion program aimed at boosting Aramco’s crude production capacity to 12MM bpd is comleted

Saudi Arabia eyes oil flotation to create world’s most valuable listed company (FT 1.8.16)

  • Saudi fiscal deficit $98B
  • Saudi Arabia has 16% of the world’s proved reserves, at 268B bbls; almost 11 times XOM’s

FCC Auction Promises Bonanza for Small TV Broadcasters (WSJ 1.6.16)

  • Auction structure
    • FCC purchases broadcast spectrum via a Dutch Auction process, where ‘values are set at a high level and then diminish’ until the spectrum is sold at the lowest possible price
    • FCC then turns around and sells the spectrum to Telecom companies in a traditional rising bid auction
  • TV station values
    • WLIO (Lima, OH): $110 million
    • WKTV (Utica, NY): $250 million
    • WNGH (Chattanooga, TN): $350 million
    • WHTV (Lansing, MI): $410 million
    • WCWG (Salem, NC): $470 million

Sales Downshift at Heavy Truck Makers (WSJ 1.6.16)

  • HD truck orders down 37% YOY in December
  • Dealers stuck with over 57,000 unsold trucks – a number last surpassed in 2006
  • Truck dealerships/truck fleets
    • JX Enterprises – 19 truck dealerships in the Midwest
      • Eric Jorgensen, CEO
      • 150 unsold new trucks, up from under 40 a year ago
    • Truck Center – 7 dealerships in the Midwest
      • John Hopkins, CEO
    • Odyssey Logistics & Technology
      • Operates fleet of 300 trucks
      • Ordered 70-80 new trucks in 2015, but expects 50% of that in 2016
  • FTR projects 260,000 new US trucks sales in 2016; down from 290K estimated three months ago

January 2, 2016

Thoughts from a physical oil trader (12.30.15)

  • Oil market remains oversupplied into 3Q16, with 2Q16 being the peak
  • The “flush out will be painful”, but will create “generational opportunities”
  • “Since the 1970s, people don’t realize how advantageous this market is right now. This happens once every 10-15 years.”
  • The pendulum swings to extremes in commodity markets – too many BBLs brought to market over the last several years…now the market is swinging violently in the opposite direction. But producers need to feel more pain before it ends…
  • “This is a very big boy game with the likes of core OPEC and large non-OPEC nations. Historically this ends in one fashion…war.”
  • “Highest probability is a civil war in Venezuela.”
  • “If people are patient, time it right, and are in the right assets you will make multi-generational money in the next three years.”

17M Comments. This is a ‘ding ding ding’ investment moment, and the epitome of my ‘pay close attention to experts’ philosophy. Clearly the commentary does not spoon feed investment ideas, as it makes a highly conditional statement regarding a ‘multi-generational’ opportunity; but it at least provides a framework under which to operate in the coming months and quarters. At minimum, a plan – good or bad – must be a developed; as such, an out-sized portion of my research time will be spent preparing for this multi-generational’ opportunity sometime in the 2Q-4Q16 time frame.

While the best opportunities are going to be in small, opaque, beaten down distressed names, the best ‘return on invested brain damage’ is going to be in high quality (and highly liquid) babies thrown out with the bathwater that you can take larger positions in. The high quality equity side is relatively straight forward – it’s just a matter of waiting: E&P – OXY, HES, DVN, CRC (?); OFS – HAL; Midstream – ETE/WMB, KMI. It is on the distressed debt side that I am most intrigued with, led by CHK..

While to-date I have largely only followed CHK from the sidelines, my preliminary hunch is that CHK could be the ‘Lehman Brothers’ of this Energy crisis – an extremely complex, highly liquid capital stack supported by a base of quality ‘core’ assets with mark-to-market valuations weighed down by complex liabilities and extreme market conditions. As one of the largest US natural gas producers concentrated in the highest quality basins, and the center of a highly illiquid Energy junk bond market, I believe CHK will likely be the epicenter of this ‘multi-generational’ opportunity, and worth devoting the bulk of my research time to over the coming months and quarters.

On-going CHK analysis will be conducted on the CHK Working Page.

December 24, 2015

How the Third Avenue Fund Melted Down (WSJ 12.24.15)

Two lessons:

  1. Culture, culture, culture, culture, culture
  2. There needs to be a dictator at the helm of an investment organization. Buffett, Tepper, Loeb and Ackman are all dictators. Marty Whitman outsourcing decision making to a CEO while he focused on ‘reading 10Ks’ is NOT a good long-term strategy.

December 23, 2015

Fortnightly Thoughts (Goldman Sachs 12.17.15)

What we think about when we think about themes

  • It is increasingly fruitful to group companies according to Process (how they sell) and Platform (who they sell to), rather than just Product (what they sell)
  • Central battle is Abundance versus Scarcity 
    • Rising abundance in capital, energy, labor and data, accompanied by rising EM competition and technology, putting downward pressure on barriers to entry
    • However, these forces are somewhat opposed by industry consolidation and regulation
  • Five key themes:
    • Capex: Lower for longer
    • Tech is everywhere
    • Globalization of competition
    • The end of the EM era
    • Imbalanced societies

When we think about themes

  • What is a theme?
    • It is any significant change that impacts a not necessarily obvious group of companies, and reshapes industry revenue/profit pools with respect to their size and composition
  • Themes often reflected much more quickly in the ‘winners’, whereas the impact on losers plays out over many years
    • For example: “Fifteen years after AMZN expanded from selling more than just books, the likes of BBY and WMT are still seeing earnings and share price declines.”
    • Forward-looking example: “Autonomous cars should shrink the revenue pool for motor insurance providers. But waiting for this to appear on their P/Ls before investing int he theme could shrink the opportunity set. It’s likely to show up in the risk (multiple) before it shows up in earnings.”
  • ‘Process’ examples
    • Supply chain logistics/distribution capabilities: Deutsche Post, Coke, Trimble
    • Ability to enter new markets while keeping their core offering consistent: McDonalds, Visa, Starbucks
  • ‘Platform’ examples
    • Sticky ecosystems that raise exit costs: Apple, GE, SAP, Amazon
  • Themes don’t last forever
    • Music industry is a good example of an industry that adapted to digitization and is now back on a growth path
  • Current themes: 
    • Energy – Currently oversupplied market, due to years of robust investment, coupled with advances in renewable energy, likely keep energy prices low permanently
      • 17M Note: This is actually quite cute considering Goldman was calling for $200 oil in 2008. Barring a game-changing advance in renewable technology, low spare capacity and decline rates promise to normalize oil prices far higher than current levels over a 5-10 year period.
    • Capital – Savings glut has resulted in abundant capital conditions, which has served to prop up even the most distressed capacity
    • Data – 98% drop in the cost of communication + rising connectivity has created an abundance of data
    • Labor – Technology continues to displace human capital, thus creating a glut of human capital, which pushes down wages
    • Capacity – Emergence of EM competitors has added to persistent overcapacity in global sectors such as steel, cement, paper and consumer electronics

Theme stream

  • Everything as a Service
    • Catalysts – Cheaper tech hardware reducing the cost of measuring equipment utilization
    • Theme – Product or equipment companies increasingly offer core product ‘as a service’
    • Direct Implications – Higher recurring revenues, higher exit costs for customers
    • Second-Order Implications – Capex turns into opex, biz cycle shrinks
  • Income Inequality
    • Catalysts – Globalization + technology: demand for highly skilled labor exceeded supply, driving up wages v. lower skilled labor, damaging DM middle class incomes
    • Theme – Gap between 10% and the rest of society rising, especially in the U.S.
    • Direct – Middle class discretionary spending remains weak
    • Second – Pressure to raise minimum wages generates cost-based inflation for local and labor-intensive sectors
  • EM Competition
    • Catalyst – Local competitors in China and other EMs have gained scale, but domestic EM demand is slowing
    • Theme – EM competitors making it increasingly hard for DM companies to make money in EMs
    • Direct – DM exporters lose share, face higher costs of doing biz
    • Second – Sticky overcapacity in more industries, resulting in deflation

Investing in the new, new world

  • Abundance levels the playing field for countries 
    • Advantage of low-cost labor has diminished, owing to the increasing supply shock of automation and artificial intelligence
    • Country-level competitive advantage will revolve around the ability to generate and monetize intellectual property, the ability to attract skilled labor, and the strength of the legal system
      • U.S. continues to stand out in this regard…
  • Digital scale matters 
    • Companies with scale dominance via the network effect (GOOG, FB, LNKD) have user dominance versus product dominance
    • Michael Porter’s example of the new world order: it is not enough for a company to only sell great tractors anymore. It needs to sit at the center of the agricultural ecosystem to enjoy credible entry barriers
  • Entry barriers 
    • Technology dramatically reducing the cost of starting a business; somewhat offset by consolidation and regulation
    • Brand strength and logistics networks remain formidable barriers to entry
  • What is scarce?
    • Sports, blockbuster movies, live events, prime real estate, clean air and water in some places, valuable brands, private networks, anonymity, life-extending drugs, quality jobs, and pockets of skilled labor
  • Long-term investing
    • With the timeline around disruptive threats to industries uncertain, being nimble becomes even harder
    • Technology is leveling the playing field for an informational advantage, limiting alpha potential from mean-reversion strategies
    • “The mean reversion school of investing obviously still exists, and paying 20 cents for a dollar of value is always a great strategy. But mean reversion investing is tough in industries with deteriorating economics, meaning the terminal value decline needs to be factored into the estimation of value in order to avoid value traps.”

December 22, 2015

17M Notes from breakfast with power & utilities MD (12.22.15)

  • 2015 market environment
    • Worst year he has had in his professional career
      • Extremely cool to hear somebody this smart walk thru his decision-making process on various ‘trades’; not because misery loves company, but because it is simply confirmation that THIS GAME IS NOT EASY!!!
      • Said a high-conviction trade went ‘south’ on 8/24, and when it failed to rally with the market he stayed in it due to highly compelling fundamentals. Said he knew the fact that it failed to rally with the market was a tell-tale sign to bail…and it went down a further 40%+
    • Sentiment among active managers could not be worse. Customers going out of business; nobody has a clue what happened this year, nor what they would have done differently. Anecdotally (sp?) average underperformance v. SPX 3-5%. “Environment feels like 2008.”
  • 2016 outlook
    • Basically consensus: flat to down SPX; +7% USD; Treasury curve flattens; lower HY as FI flows into IG; + Tech/Fins; – Industrials, Energy
  • High level Energy market thoughts
    • Natural gas a disaster thru 1Q15 – presumably b/c of weather (didn’t say)
    • LNG the product cooked long-term; LNG the stock actually good – agrees with Icahn on contract structure (I still need to dig into LNG the stock…)
    • Fact that XOM is not buying anyone is bearish for oil prices
  • Energy Infrastructure
    • Energy Infrastructure is THE place to ‘play’ the North American Energy market thru 2025 and beyond. Three drivers:
      • US environmental policy driving power demand for natural gas; and supply MUST be consistent and stable for utilities to rely upon
      • Mexican gas imports 
      • North American O&G bottlenecks – We know where the resource is, no it is a matter of “poking holes” in the most efficient manner possible. Production will shift from the overleveraged high-cost producers to the most efficient producers (CHK to XOM, for example), and a big part of the low-cost profile will be from infrastructure removing pricing bottlenecks.
    • Next 1-2 years will be a ‘digestion period’ for an over-leveraged infrastructure industry with a terrible ownership base – the strong will get MUCH stronger…
    • ETE
      • Friends with board member – best board he is on (or has been on), and an incredibly well-managed company
      • Friend said WMB deal was a close vote due to the leverage, so could become a concern prior to deal closing…
      • My friend’s utility contacts are licking their chops at the assets that could come out of the WMB entity, which led to discussion re private market values versus public…
    • I have heard that midstream assets are going for far higher multiples than publicly traded assets are trading for at present; utility friend partially confirmed this today, as he is seeing ‘hairy’ utility & power assets going for at least a ‘turn’ or two higher than public multiples. Utility friend said that this in conjunction with the fact that credit markets ARE NOT leading midstream equities down should equal a value investors dream world…I AGREE. 

Cheniere Energy chief executive toppled at moment of triumph (FT 12.15.15)

  • LNG: gas supercooled to about -161 degrees centigrade so it can be transported in tankers
  • 64 million tonnes per annum (mpta) of LNG export capacity now under construction in the US, with Cheniere building ~31.5 mpta.
  • The ‘landed price’ of LNG in Japan has dropped from ~$16 in April 2014 to ~$8.50 today
  • DOE has approved 16 projects for unrestricted worldwide exports of gas, or about 105 mpta; just under 2/3 is currently under construction
  • Cheniere’s first two ‘trains’:
    • Buys gas at roughly HH, then sells it at a guaranteed 115% of that price + a flat fee of $3.50

GS The New Oil Order – Crunch Time (12.17.2015)

Goldman Oil Balance Spreadsheet PDF

  • Lack of hard OPEC ceiling a problem
  • 4Q15 global market imbalance approximately 1.5 mbd
  • 2016 average surplus ~580 kbd, going negative only by 4Q16
  • OPEC crude +640 kbd in 2016
  • Non-OPEC/L-48 production declines by only 100 kbd, led by growth in GoM, North Sea, Canada, Argentina, Brazil and Russia
    • Non-OPEC/L-48 resilience continues as producers focus on limiting decline rates of legacy assets
  • In September 2015, Goldman E&P analysts estimate that at $40 WTI, and the current US cost structure, L-48 production would fall by 525 kbd
  • 2016 US production declines need to include reductions by IG E&Ps, which represent 85% of US production and grew production 2% QoQ in 3Q15
  • Given the lower-than-expected capex cuts, sub-$40 WTI is likely required to force production cuts
  • “This adjustment mechanism is further put at risk by the deeply entrenched expectation that the global oil market will require shale production growth within the next couple years.”
  • High-cost producers – typically CAD oil sands – have operating break-evens (OBE) of $30. But oil sands typically have low leverage, so less incentive to shut-in at OBE than high-leverage shale producers. As such, oil may need to go to shale OBE of $20…

December 15, 2015

BAML Global Fund Manager Survey 12.15.2015

  • USD 3 times more crowded than any other trade
  • Demand for ‘improved balance sheets’ jumps to highest since July 2010 – payout ratios ‘too high’
  • US equity UW at 8-year highs
  • Most bearish Industrials since September 2012
  • First signs of shift from growth to value
  • Only 7% expect a recession over NTM

WSJ 12.14.15 – Random Notes 

  • Junk bonds
    • Clear Channel Communications trading at $61
    • FCX at $58
    • Declines in junk bonds exacerbated by the absence of large banks, whose trading has been curtailed by new regs
  • Cheniere Energy (NYSE: LNG) 
    • Ousting CEO
    • CEO likely far overpaid
    • Wants to take the Company outside of its core LNG export biz
  • Eric Jackson YHOO 
    • Thinks YHOO is worth over $100 per share by cutting staff (boosting EBITDA by more than $2B); YHOO Japan buying back stock; Sale/lease-back of corporate headquarters; leveraging pro forma EBITDA to repo a ton of YHOO stock
  • XOM new president 
    • Darren Woods elevated to President role; in line to succeed Tillerson in 2017
    • Background is oil refining and chemicals, versus E&P for Tillerson
    • 50 years old

Amazon aims to go it alone with deliveries (FT 12.12.15)

  • AMZN has built more than 120 giant warehouses worldwide
  • Now looking to take its logistics technology beyond the warehouse to the delivery channel
    • Investing heavily in truck trailers, on-demand delivery workers, and a new proprietary delivery hub (kept under wraps thus far)
  • AMZN shipping costs have risen to 12% of sales (though does not say what this has been historically)
  • Prime Now – one-hour and two-hour delivery service
    • Has opened more than two dozen Prime Now delivery hubs, and
    • Hired delivery drivers in more than a dozen cities who use their own vehicles and work flexible hours
      • (17M: Obviously an Uber connection here…)
  • ~4% of UPS’s volume is tied to AMZN
  • Due to increasing amounts of e-commerce deliveries, UPS’s cost per package has grown at ~2.3% p.a. between 2000 and 2010
  • UPS and FDX have painstakingly built databases telling drivers precisely how to find addresses; and both have found that customers are ever less willing to pay for premium delivery services

Merger of Dow, DuPont Likely to Get Close Antitrust Scrutiny (WSJ 12.10.15)

  • Global Ag market
    • DowPont 17% global share
    • Syngenta 21%
    • Bayer 20%
    • BASF 13%
    • Monsanto 9%
    • Other 20%
  • DowPont combined ethylene processing capacity 10.3 billion pounds per annum; ~15% of US capacity

Dow Chemical Long Pursued DuPont (WSJ 12.10.15)

  • DowPont 2014 financials
    • Sales $93.2B
    • Agriculture: 23%
    • Performance Materials & Chemicals: 48%
    • Nutrition & Consumer Products: 20%
  • Dow attempted to purchase DuPont in 2006; was rejected, then moved on to Rohm & Haas Chemicals
  • Originally Liveris and Breen discussed a merger then split into Ag and Materials…
  • …Talks morphed into a split into Ag, Materials and Other (comprised of various specialty chemical products like nutrition that did not fit well with the others)

Keurig Green Mountain Taken Private in $13.9 Billion Deal (WSJ 12.8.15)

  • JAB buying GMCR for $13.9B; ~78% premium
  • JAB manages money for the Reimanns, a wealthy German family
  • JAB brands include: Bally, Jimmy Choo, Coty
  • GMCR will make JAB a stronger competitor to Nestle, the largest packaged-coffee company in the world
  • GMCR has roughly 20% share of the PC market in the U.S.
  • Global PC market ~$80B
    • Post-deal JAB will have mid- to high-teens share of global market
    • Nestle share approximately mid-20%
  • JAB bought Caribou Coffee and Peet’s Coffee & Tea in 2012; and Einstein’s Bagels in 2014
  • In 2015, JAB Merged its DE Master Blenders biz with MDLZ’s international coffee biz

November 30, 2015

Tom Wheeler – Charlie Rose (11.3.2015)

  • Consumers should have unfettered access to the internet
  • Content creators should have unfettered access to consumers
  • Paid prioritization – fast & slow ‘lanes’; throttling; blocking
  • Condition to DTV purchase was AT&T has to bring fiber to 12.5 million new homes – promotes competition with the cable cos
  • 83% of Americans have access to HSBB, but 2/3 can get it from only 1 company
    • (But FCC changed definition of HSBB…)
    • TMUS innovation post-S block is the epitome of what Wheeler is after
    • 5G will be the enabler of the ‘Internet of Things’
    • 50B connected ‘things’ by 2020
    • Technology must be ‘low latency’, meaning they must interact real quickly
    • Need new spectrum that is harmonized around the world

November 20, 2015

John Malone Scale & Media Interview (11.12.15)

  • Involving yourself in content creation de-commoditizes distribution
  • What effect does the mobile/IP revolution have on content distribution? Still trying to figure that out from an investor/philosopher perspective
  • Challenge is to take the traditional creative process and integrate it with a global distribution mentality
  • Discovery
    • Goes from primarily a re-distributor of others’ content in the U.S. to…
    • …now creates & owns content that is distributed on a global basis
  • Integrated media model – Comcast – ideal in the U.S.
  • Discovery and LGI CEOs in great position to examine the world from a global perspective
  • FB enjoys global reach because the Internet is global, and the IP standards are consistent across countries
  • Interactivity, a huge draw for social media, has been lacking on the linear TV side
  • Huge Internet/Telco/Comcast firms looking massive relative to smallish media firms…consolidation is coming
    • Malone basically calling his shot by saying he is “positioning capital” for the coming media consolidation
  • TWC/Comcast deal break: government redefined broadband, which put Comcast in a monopolistic position
  • Tom Wheeler is rational; New Charter way below the new BB definition
  • “Why would i exit Discovery when it’s a double bank shot.” – Malone in reference to the potential for regulators to require him to divest of conflicting assets…said he would rather sell his CHTR stake than his Discovery stake…
  • How can you ‘gate’ the CHTR/TWC deal when Comcast is as large as it is?
  • VOD deal:
    • Malone/Fries did not understand the issues VOD has had the last few years
    • Deal could get done with a more creative structure – VOD guys like dividend/low leverage, versus no dividend/high leverage on the Liberty side…
  • Skeptical that Drahi can extract the synergies projected from CVC

VRX Deutsche Bank Derm Survey (11.17.15)


  1. How has your prescribing of Valeant drugs changed (regardless of
    pharmacy channel) since Valeant ended its relationship with Philidor?

    • 68% said decrease; none said increase
  2. How do you expect your prescribing of Valeant drugs to change in the
    coming months?

    • 68% said decrease; none said increase
  3. What do you view as the most important benefit of prescribing via specialty
    pharmacies (such as Philidor)?

    • 36% more affordable; 32% ease of use
  4. How do you think Valeant will be positioned as a player in dermatology after
    the company moves beyond the current period of disruption related to ending
    its relationship with Philidor?

    • 64% weaker; 36% similar
  5. How has the recent news regarding Valeant and Philidor changed your
    relationship with your Valeant representative, your view on prescribing
    Valeant’s drugs, or anything else?

Select Question #5 answers:

  • I still like many of the drugs, but will find it harder to prescribe them due to reimbursement concerns.
  • While representatives had little credibility to begin with, it seems more of a game than ever, so the reps are seen as untrustworthy and just seek to hit numbers more blatantly than before.
  • Reps are confused/defensive/uncertain. Derms are a bit confused as well as to how our patients will acquire valeant products.
  • I am concerned that Valeant may not be able to chart a reasonable course forward after the Philidor debacle. However, if they come to me with a
    reasonable plan for access to Valeant meds, I will likely use it.
  • I will be sending the valeant prescriptions to a different pharmacy. However, now I will not tell patients that there may be no co-pay required. My
    relationship with my representatives has remained the same since they were not directly involved in the issues regarding philidor.
  • I have decreased prescribing because I know we have a lot of challenges when sending Valeant’s branded drugs to local pharmacies. Until they offer a solution that eases administrative burden on my office, I am likely to prescribe much less of their products.
  • Valeant’s derm future depends on a plan B for prescribing their drugs. Its current survival can be attributed to their making online rebates available for most of the philidor drugs. No change in relationship.

VRX Canaccord IMS Data Note (11.18.15)

  • Checked IMS weekly Rx data on 11 of top 30 drugs
  • Xifaxan weekly Rx data shows YOY growth accelerated to close to 30% – 26% average QTD
    • Believes could be a $1.7B drug in 2016
  • IMS does not capture Specialty Pharma channels…to be fair
  • Jublia volume thru SP will be materially affected in 4Q15
  • Believes Xifaxan could be $3.94 of 2016 EPS…
    • $1.725B sales
    • 95% GPM
    • $250MM SG&A; $10MM R&D
    • 350MM shares; 0% tax rate
    • 17M Note: This is a joke…as the maintenance R&D margin is not only .6% of sales

GOOG BAML Cloud Note (11.20.15)

  • ‘Cloud’ market TAM ~$200B, with IaaS and PaaS making up over $100B
  • ‘Comfortable’ duopoly between AMZN and MSFT; GOOG’s entrance could pressure AMZN biz and stock
  • BAML believes it is interesting that GOOG included its relatively new ‘cloud’ biz within ‘Google businesses’, rather than the ‘Bets’ businesses…potentially means GOOG is going ‘big’.

CME Group: Political clout counts (FT 11.19.15)

  • CME allowed to take over CBOT; but since then has captured 99.97% of US interest rate futures and options volumes
  • DOJ antitrust department warned in early 2008 of monopolistic concerns…
  • …but after Lehman, CME’s ‘smooth liquidation’ of various positions bolstered the case for CME’s biz model
  • CME has big political clout, with three in-house lobbyists and 15 more under contract
  • Despite huge margins – over 60% EBITM – CME argues competition is fierce, and that 80-cents per trade, a fee lower than it was five years ago, is not indicative of monopolistic powers

November 19, 2015

Emerging markets: Deeper into the red (FT 11.17.15)

  • Since 2008, private debt as a % of GDP in EM has gone from ~70% to over 100%; also…
  • ROE has fallen from over 16% to ~11%

Key to shale’s future is deep int he heart of Texas (FT 11.17.15) (cannot find link) 

  • U.S. production peaked in April before falling 274 KBD to 9.324 MMBD in August
  • Bakken and Eagle Ford projected to be down 12% and 25%; Permian only down 1%
  • Horizontal rigs down 68% in the Bakken, 66% in the Eagle Ford, and 49% in the Permian

September 15, 2015

Inflation risk neglected by smug markets (FT 9.5.15)

  • Dominic Rossi, CIO at Fidelity Worldwide, believes the on-going Emerging Markets crisis is the third deflationary wave sweeping the globe after the U.S. financial crisis in 2008, and the Eurozone crisis in 2011
  • Multi-decade disinflation driving belief that inflation is permanently dead…
  • U.S. CPI by decade:
    • 1970’s: 7.1%
    • 1980’s: 5.6%
    • 1990’s: 3%
    • 2000’s: 2.6%
    • 1H 2010’s: 1.8%
  • Jeremy Grantham: “…What a hero you would have to be to believe that inflation will never go back to 4 percent.”

I would think a leveraging cycle would be inflationary, as economic participants consume more than their income supports; but this disinflationary cycle has occurred alongside a leveraging cycle. So I have no clue here…which is why I do not ‘do’ macro.

What I will keep an eye on is the GDP gap (i.e. nominal GDP v. potential GDP) and wage pressure commentary coming out of company commentary. Outside of these two ‘indicators’, I have zero edge on inflation. My guess is that if and when inflation becomes a problem, the market will act with a lag, thus there will be time to adjust any valuation inputs if necessary.

Tesla: Time to accelerate (FT 9.11.15)

  • Tesla’s third car, the Model X, is a sport utility vehicle with “falcon =0wing” doors and an expected starting price of $90,000
  • Building a $5B 1,000-acre Gigafactory to build lithium ion batteries in Nevada
  • Tesla has been around for 12 years
  • Second model, Model S, was launched in 2012
    • Received a 103 out of 100 from Consumer Reports, which called it the best car it has ever reviewed
  • By FYE 2014 Tesla had spent $3.3B on capex and R&D
  • Expects to sell 55,000 cars this year, with a goal of 500,000 by 2020
  • Musk owns 22% of the stock
  • The mass-market Model 3 is expected to start production in two years, selling for $35,000
  • $1.5B capex expected in 2015
  • Morgan Stanley’s Adam Jonas estimates $14.4B of capex and R&D between 2015 and 2020
  • “Big vision, big balls, big bets, big claims…” are Elon Musk’s hallmarks
    • Zip 2 – his first internet venture
    • – eventually became PayPal
  • Model X deliveries expected to miss targets, resulting in Tesla failing to meet its goal of becoming FCF-positive this year
  • Toyota and Volkswagen outsource approximately 75% of parts, whereas Tesla builds many in-house

September 12, 2015

Brazil’s Big Bet On China Turns Sour (WSJ 8.28.15)

  • Stock market down 22% YOY; BRL down 33%
  • 2Q GDP growth projected to be -1.7%
  • Inflation approaching double digits; UER and interest rates rising
  • “Brazil is in danger of losing its investment-grade rating, to judge by the views of credit-rating firms, potentially sparking a disorderly currency decline.”
    • 17M Note: This past week S&P downgraded Brazil to ‘junk’ status, yet the BRL failed to decline to new lows (off the top of my head; if it did, it was minimal). Potential high probability that lots of poor economic news is already baked into the currency here…
  • Brazilians exiting the country for Florida, NY, etc.
  • Exports: iron ore, soybeans, beef, oil
    • China trade: $2B in 2000; $83B in 2013
    • China is largest trading partner
  • Investors poured more than $1T per annum into EM countries
  • “Brazilian Miracle” from 1966-1973 followed by hyperinflation and debt crises in the 1980’s
    • In the 80’s Brazil stabilized its currency via spending cuts and taming inflation
  • China demand for iron ore lifted prices from $19 in 2000 to $126 in 2011; on the back of which Vale launched a $16B expansion of its main iron ore complex
  • President Dilma Rousseff’s approval rating is 8%
  • $371B of CB reserves available to ‘cushion’ the slump
  • Exports to China down 19% in the first seven months of 2015

McDonalds Lands in a Real-Estate Dilemma (WSJ 8.26.15)

  • Glenview Capital sees a RE spin unlocking upwards of $20B (See 4Q investor letter)
  • REIT SpinCo may not be worth it, however, due to the $6.1B of rental payments made by franchisees
  • Sanford Bernstein analyst Sara Senatore estimates MCD real estate is worth ~$30B
  • According to Senatore, “What’s reported as rent is really rent plus MCD’s premium,” which a a standalone REIT would not be able to charge

Cell Carriers Battle for Wi-Fi Airwaves (WSJ 8.26.15)

  • VZ and TMUS preparing to broadcast cellular signals over WiFi; GOOG, CVC et al are worried the signals could take up space currently used by cable cos to offset the very mobile capacity demanded by cellular customers
  • VZ/TMUS using new technology called LTE-U (i.e. LTE over ‘unlicensed’ spectrum, or WiFi)

Online media: Small screen, big money (FT 8.22.15)

  • YouTube 10 years old this February; hours watched +60% and advertisers +40%
    • Now reaches more 18- to 49-year olds than any cable network (17M: ok yippy…it’s garbage video…)
  • Online video ad market forecast to hit $8B this year
  • FB users 1.49B v. 1B+ for YT
    • 4B video views per month

August 21, 2015

WSJ 8.20.15

  • Divided Fed
    • Consternation over a September rate hike
    • Overseas a concern, but labor market expanding here
    • Want ammunition going into next crisis

Shocking that a rate hike receives so much attention. Even if rates went to 1%, business fundamental would not change, and corporate spreads woudl likely narrow, as lending has a natural rate floor regardless of the “Spread” denominator.

  • VRX deal
    • $1B – $500MM up front, $500MM next year
    • Woman’es libido
  • CAD oil sands
    • Western Canadian Select (WCS) trading at $25, versus $41 for WTI
    • Every single BBL is bleeding production cash at these levels
    • New SAGD projects require an average oil price of $80.06 to recover shipping and other costs plus a 10% ROIC

FT 8.19.15

Rolls-Royce: in it for the long-haul?

August 20, 2015

AB Media Note

  • Biggest concern is ad revenue decline, NOT affiliate fees
  • Cord-cutting likely not going to happen in any severe way; rather, “cord-nevering” more likely
  • C3 Prime 18-49 monthly deliveries continues to decline YOY going back to january 2014, -5-10% consistently and accelerating
    • As ad revenue declines, leverage w/ affiliate fee negotiations declining as well
  • SVOD license fees $3B to $4B
  • Traditional PTV: 100MM HH, $80 ARPUPM —> 50% to cable/sat, 50% content
    • $48B direct from consumer for bundle
    • $50 to $45B national advertising

August 18, 2015 

FT 8.15/16.15

  • TWX
    • Sesame Workshop signed 5-year deal w/ HBO
    • 2014 Sesame revenue $104MM, down -10% since 2013
    • HBO/Cinemax 45MM subs; NFLX 38MM U.S. subs
    • HBO EBITM 35%

FT 8.17.15

  • HOT
    • Paulson and Och-Ziff took 7% and 6% stake in HOT

WSJ 8.17.15

  • BABA
    • Biggest threat is
    • BABA has 80% share of online shopping
    • Tmall has 59% share of online malls, versus 23% for
    • $4.5B for 20% stake in electronic retailer Suning Commerce Group
    • Timberland agreed to sell exclusively via Tmall
    •, like AMZN, buys inventory

WSJ 8.18.15

  • Cable ratings decline
    • In July, 21 of top 30 channels saw significant declines
    • TNT, #1, -22% from July 2014
    • Disney Channel -10%
    • Bravo (Comcast) -23%
    • MTV -24%
    • ABC/FOX/CW increased viewship
    • CBS and NBC -4% and -5%
    • Broadcast and cable channels averaging 94.7MM viewers in primetime; -3% over 2014, and -6% over 2013
    • Advertisers primarily pay using live + 3 days
    • FX CEO: “As you can start marketing to individual people who are the appropriate people to tell about your products, you don’t care basically whether they’re watching the fourth season of the Americans or the first.”

August 11, 2015

WSJ 8.11.15

  • CVX
    • PPS down -32% YOY v. -20% for XOM
    • Looking to boost output by 20% over two years
    • Cutting jobs, delaying divy hike, delaying projects
    • $54B gas export plant in Australia
    • Outspends XOM despite 50% of the revenue
    • By YE12, Gorgon project cost up 40% to $52B
  • BABA
    • $4.5B investment for 20% stake in Suning Commerce Group; net $2.25B due to share sale to Suning
    • Suning an electronics retailer
    • Sunings nationwide logistics network of dozens of distribution centers and more than 1,700 “last mile” delivery stations, will join BABA’s logistics affiliate Cainiao
  • Energy Future BK Exit
    • Oncor valued at $18B; EF owns 80%
    • 80% stake taken over by consortium of investors inside and outside bankruptcy
    • Consortium putting up $7.1B equity and $5.1B debt
    • Oncor will be a REIT
    • Electricity & retail spun off tax-free to creditors owed >$24B

August 7, 2015

WSJ 8.7.15

The Consequences of a Washington Internet Power Grab

  • Written by Michael O’Rielly of the FCC (since 2013), and Maureen Ohlhausen of the FTC (since 2012)
  • FCC meddling in Internet privacy & security via its so-called “Open Internet” rules, which went into effect June 12th.
  • Open Internet = Net Neutrality –> rules decalre that retail BB access is a “telecommunications service” to be regulated under Title II of the Communications Act of 1934, which governs common-carrier services
  • FCC Enforcement Bureau will examine whether the privacy practices of BB providers are “reasonable” and “in good faith”.
  • A Consumer Watchdog petition asks the FCC to extend NN privacy rules to Internet ‘edge’ providers – such as Google, Facebook, YouTube, etc. – which would supplant long-established FTC review with a less-savvy regulator (i.e. the FCC).
  • The FTC already regulates Internet issues such as: spam, spyware, social networking, behavioral ads, P2P file sharing, mobile apps and more

Despite Glut of Oil, Energy Firms Struggle to Turn Off the Tap

  • U.S. oil production peaked at 9.7MM BPD in March before edging down to 9.5 in May
  • Oil will need to average $45 for ~6 months in order to stem production; and ~200 oil rigs will need to come offline by 2016
  • Whiting tooling itself to grow at $40 to $50 oil

Ad Woes Pummel TV Firms

  • 2Q15 U.S. ad revenue
    • VIA -9%
    • DISC 0%
    • CBS -3%
    • DIS -3%
    • FOX -14%
  • By 2018, eMarketer predicts digital ad spending will total ~$83B in the U.S., while TV will generate ~$78.6B
  • ~50% of VIA revenue comes from ads
  • Industry focused on new ad technology that will help embed ads into VOD
    • [Ergen has talked about this at length in previous DISH conference calls…yet again, leading the industry by a large margin…]
  • TWX CEO said: “We’re int he very, very early stages of seeing TV make a dramatic comeback on the attractiveness of advertising.”


I do not yet have my thoughts coherently assembled on this topic, but a good FinTwit investment bud said to me yesterday that once the CHTR/TWC merger closes Malone may go after a content company – perhaps TWX or CBS. This is an interesting perspective, as it could give the content guys greater leverage over consumer video consumption. I will keep mulling…but I like my current DISH/CHTR positioning within the media ‘space’, so will continue to monitor from the periphery.

August 5, 2015

FT 7.31.15

  • China woes
    • Ford predicts first full-year fall in auto sales since 1990
    • BUD volumes fell 6.5% due to “poor weather across the country and economic headwinds” (wow)
  • Shell cost cuts
    • Prepping for prolonged slump in oil
    • Not planning for $90 oil
    • Expect $50B asset sales between 2014 and 2018

FT 8.1.15

  • PG
    • New CEO David Taylor 35-year PG vet
    • 17M thoughts:
      • Organic growth poor; currency big headwind
      • Product portfolio being rapidly rationalized
      • Would not mind picking up @ 15X a fully-taxed EPS figure

FT 8.3.15

  • Rolls-Royce
    • ValueAct took 5.4% stake
    • Pushing for cost cuts and a BOD seat
    • Took stake after studying new CEO Warren East, who previously ran chipmaker Arm Holdings
    • Focus on the core aero-engines division
    • difficult transition from current generation Trent 700 engines – Airbus A330 engines – to the Trent 7000 – the new engine for the new A330 Neo
    • Jeff Ubben has connections to RR BOD director John McAdam – both of whom were on the Sara Lee BOD for four years

WSJ 8.3.15

(Article to read later.)

Dole and Other Companies Sour on Delaware as Corporate Haven

WSJ 8.5.15

  • Shire/Baxalta
    • $30.6B  unsolicited bid
    • Shire waited less than a week after contacting the Baxalta BOD before launching its bid
    • Shire bought NPS in February for $5.2B; participated in Salix bidding process
    • Baxalta defenses:
      • 9.9% poison pill
      • Overlapping 3-year BOD terms
      • Inability to hold special meeting

July 31, 2015

WSJ 7.30.15

  • PG
    • Underperformed SPX by 11.4% p.a.
    • Targetting $70B reduction in shares
    • Currency a major headwind

WSJ 7.31.15

  • Comcast/Verizon Deal
    • Comcast wireless resale deal with Verizon struck in 2011 when data plans were less relevant
    • Adding cable cos to the mix potentially intensifies the telecom industry price war
    • Comcast lokoing to go WiFi-first; but requires handset modifications

July 29, 2015

WSJ (7.29.15)

Oil Export Momentum

  • EIA estimates U.S. output could hit 18MM bpd by 2014 (really?)
  • Brookings Institution estimates the ban could increase U.S. production by upwards of 4.3MM bpd by 2035 (really?)

I would be skeptical of these estimates given the decline rates of production for U.S. shale, the strong tendency to drill the best wells (by far?) first. FWIW, Jeremy Grantham estimates that within 5 to 8 years U.S. production will begin to peak. And in the 3Q14 GMO Letter Oil Note, Grantham highlights the speed with which we are burning thru our domestic shale oil reserves.

The biggest consequence – mentioned not once in the article – is the effect on U.S. refiners, which have enjoyed enormous profit margins due to their ability to source an input $5 to $10 per bbl cheaper than which their end product is priced off. Refiners certainly do not reflect this risk at present; so at minimum I would expect a correction in the stocks if export ban momentum gains significant traction. If the ban is ultimately doomed, the correction will be an attractive buying opportunity. Something to watch.

The most bullish, IMO, would be for shale oil producers in highly disadvantaged basins such as the Bakken. But with transportation still an issue, perhaps producers would not be able to capture much of an uplift. Again, something to watch.

GM, Ford, Flourish Out of the Limelight

  • Ford says China volumes at best flat in 2015
  • Ford China market share ~4.6%
  • 1H Global Car Sales:
    • VW 5.04MM
    • Toyota 5.02
    • GM 4.86
    • Ford 3.26
  • GM/F earned ~$9B in 2Q15; 10% EBITM (can’t tell if combined or one or the other)
    • Morgan Stanley’s Adam Jones says 10% is in line or materially above German premium auto makers

Random Notes

  • BP
    • Environment ‘feels’ like 1986
    • Does not expect to be an acquirer of assets
  • MRK
    • Remicade sales hit by generic versions sold by Hospira and Celltrion in Europe
  • PFE
    • Moving aggressively toward 2016 split (despite ‘playing’ coy – hardly)
    • Split will ultimately cost upwards of $1B
  • DD
    • Missed guidance, of course
    • Met with Trian in July post-proxy
  • UPS
    • Strong USD helping international biz
    • Looking to raise price and control costs heading into holiday season, after two straight holiday season misses

Teva Pharmaceuticals (TEVA) 

TEVA AGN Transaction Presentation July 2015

TEVA projects FCF of ~$8.5B in 2018; and assuming 10% dilution to a current share count of ~960.4MM (Factset), 2018 FCFPS is ~$7.97. Valued at 15X 2018 FCFPS at FYE 2017, TEVA is currently worth ~$94. If 12.5X, then $78.

Likely a thought I need to keep to myself, as it is likely too far-fetched, but I wonder if a TEVA/AGN Generics wouldn’t have the heft to go after MYL…

June 23, 2015

WSJ: Ferrero Thorntons

  • Ferrero buys Thorntons in a $177.7MM deal; a 43% premium
  • Thortons’ financials (June FYE)
    • 2016E EBITDA: $30.2
    • Net Debt: $61.5
    • Take-Out EV/EBITDA: 7.9X
  • Ferrero has a goal of doubling its $9B revenue base by early next decade

WSJ Op-Ed: Raisins Taking Case

  • Horne v. the U.S. Department of Agriculture
  • 1937 law created the Raisin Adminstrative Committee, which imposes raisin quotas in order to create artificial raisin scarcity, which in turn raises prices
  • “In the 2003 and 2004 seasons, the committee tried to seize 47% and 30%, respectively, of the Horne family’s harvest – or else pay a $684,000 fine.”
  • “The liberal Ninth Circuit Court of Appeals propped up the Raisin Committee by holding that this clause only applies to real estate, not personal property. Writing for the majority, Chief Justice John Roberts shreds this distinction: ‘Government has a categorical duty to pay just compensation when it takes your car, just as when it takes your home.”

The raisins case spawned a review of the FNMAS investment situation, which will be posted today…

June 19, 2015

ConAgra Foods (CAG) 

CAG Jana 13D 6.18.2015

Nothing to see here – CAG appears more than fully valued on a SOTP basis; Jana is awful; ‘excess’ returns are possible only thru high-leverage/high-multiple divestitures of under-performing bonds; and Jana is awful…

Macy’s Real Estate (WSJ 6.19.15) 

  • Macy’s is being pushed by investors to convert to an OpCo/PropCo structure
  • Its ‘three flagships’ – New York, Chicago and San Francisco – are valued at ~$7B, or approximately 1/3 of its market cap
  • Macy’s is concerned that such a transaction would saddle it with burdensome long-term leases; would be more interested in a structure such a JV, where a partnership would highlight the underlying RE valuation

This, in conjunction with the recent Seritage rights offering out of SHLD, is perhaps highlighting an interesting trend that could develop, especially with RE markets hot, the hunt for yield strong, and the rate cycle looking to turn upwards. Likely just an unfounded rumor, but awhile back it was rumored that Pershing Square was building a stake in WMT in order to push for a Sam’s spin-off; perhaps a real estate transaction was/is part of the thinking there as well.

Conclusion: Seritage could potentially be an interesting vehicle for participating in future real estate “events”, as I imagine it would like to diversify away from its cash-incinerating primary tenant…

May 19, 2015

CSX Corporation (NYSE: CSX) 

Much has been made about the potential that Pershing Square has taken and/or is accumulating a stake in CSX in order to push for a merger with Canadian Pacific. Though I do utilize activist activity to my advantage, I do not ‘clone’ other investors, and track their every move – as such, I have not given the CSX rumor any thought until this morning when I ran across a note on Union Pacific (UNP). UNP’s projected 2016 ‘operating ratio’ of ~60% was striking, particularly in context of CSX’s current ~70% ratio…

Using Factset estimates, if CSX improved its OR to 60%, pro forma 2016 EPS would be $3.06 versus the current $2.29 estimate. At UNP’s current 2016 PE of 14.7X, CSX would be worth $45 versus a current $34, or approximately 34% higher. Relatively interesting math, but I am not sure CSX is structurally capable of a 60% OR given its coal-heavy volume mix; so that $45 PF fair value is likely too high.

I like the rail business, and given Pershing’s success turning around the CP asset, CSX may be interesting if Pershing officially becomes involved and the stock sells off significantly for an unrelated reason. At present, while CSX’s stock price does not appear to be baking in significant improvements, it does not look particularly compelling here…

May 15, 2015 

Tribune Media (NYSE: TRCO) 

Some recent commentary on Twitter brought TRCO to my attention, as TRCO was down considerably on a non-dilutive secondary (PE sale). I have some familiarity with the assets, as I invested in the equity in 2013 over the counter for a short period of time, but I have not looked at it in awhile. With private equity still owning over 30% (?) of the equity, an overhang is likely to remain, perhaps making TRCO an interesting quasi-post-reorg equity. My first pass thru a Wells Fargo April 2015 initiation was not promising, however…

Management, while extremely experienced, is investing heavily into turning the Company’s WGNA superstation into a cable network akin to AMC. I’m not sure how wise this strategy is with the world rapidly moving toward ubiquitous OTT consumption, that allows for instantaneous viewing of wide swaths of content. Right or wrong, this visceral reaction is likely smack in line with market opinion, and more than likely why the stock appears cheap to some investors.

TRCO Quick Analysis May 2015

I expected to find a back-of-the-napkin 50-cent dollar, that after greater due diligence was perhaps closer to 70 cents. My back of the napkin SOTP using primarily Wells Fargo data gets me to a $62 FVPS, including $15.55 of spectrum value. Not exciting.

I have some more reading to do on the situation, but do foresee much a change in the valuation picture without significantly more aggressive assumptions…

May 14, 2015

IBD Apple TV Ad Technology

The wireless landscape as Charlie Ergen has envisioned – now for years – is rapidly unfolding before our eyes. On numerous conference calls Ergen has outlined the significant advertising opportunity that will be available to content owners over the next 3 to 5 years and beyond. The IBD article re Apple’s pursuit of a transformational OTT product – in addition to Verizon’s AOL purchase (discussed on 5/13) – highlights how quickly the consumption of content via OTT/mobile is evolving.

I’m giddy.

Mobile data traffic is constrained by data caps/price. The wireless world needs near-unlimited capacity in order to meet consumer demands and the an “IoT” world that requires uninterrupted connection.

While the future economics of DISH’s business model are uncertain, what is certain is that the valuation base from which to judge said uncertainty is significantly higher than present levels. Once the wireless industry admits that it needs capacity, and the marketplace re-rates the valuation of DISH’s spectrum portfolio as a result – to say perhaps Ergen’s clear-as-day implied $175+ valuation – then investors can begin properly assessing the risk/reward of an investment in DISH. For example: does DISH lease its spectrum, partner with T-Mobile, partner with Comcast and its significant WiFi network, partner with Google, join up with Apple? Those are all wonderful questions to ponder when DISH is trading closer to $200…

Yahoo! Finance DISH ‘big” foray into wireless

DISH is in a heads it wins, tails Verizon loses situation. Heads, DISH is bought out or Verizon leases its spectrum at attractive rates; tails, DISH pursues a non-Verizon strategy and Verizon loses (critical?) access to capacity.

Likely, DISH stock continues to sell off as market participants fret about DISH entering a highly competitive, low-ROIC space that will dramatically impair its spectrum portfolio. What the market is missing is that DISH is led by one of the greatest entrepreneurs of all time – perhaps greater than John Malone – who is extremely risk averse, and is maniacal about putting himself and DISH into highly favorable risk/reward situations.

Prior to the AWS-3 auction, Ergen stated that he believed he could build a wireless business worth upwards of $50B. Conservatively, this amounts to a $126 fair value, after excluding AWS-3 uplink spectrum and marking AWS-3 paired spectrum to the auction average of $2.67.

Interestingly, however, on DISH’s 1Q14 conference call, Ergen said that he values DISH’s non-AWS-3 spectrum portfolio at 2 times the AWS-3 auction valuation. Gross winning bids for AWS-3 paired spectrum went for $42.46B, which implies a valuation of $84.92B for DISH’s non-AWS-3 spectrum portfolio. In a May 2014 blog post, TMF Associates utilized Ergen’s valuation framework, but removed $10B of value for the “small cells” value an acquirer would put on DISH’s ~14MM rooftops. If you remove the $10B, DISH’s core spectrum is worth $74.92B. Valuing the PTV biz at 5X $2,941 of EBITDA; the AWS-3 paired spectrum at $2.67 ($10.53B); and assigning nothing for a DE discount, which results in a net debt estimate of $17.23B; DISH is worth $179. If the $10B of small cells valuation is included, DISH is worth $201.

Oppenheimer: DISH may be eyeing TMUS

Oppenheimer brings up an interesting possibility – in effect, DISH funding a buildout/partnership thru the DEs, utilizing the AWS-3 spectrum as collateral for securitization purposes. If the DEs receive the discount, then they are restricted from leasing more than 25% of their spectrum assets, so I am not entirely sure how a securitization would look in the event the 25% discount is OK’ed.

The overarching conclusion from the report is that the wireless industry is likely to undergo a massive restructuring, potentially initiated by DISH moving first. I will continue to reiterate until proven wrong…Verizon needs capacity, and if DISH moves its free & clear virgin 20×20 capacity elsewhere, Verizon’s hand will be forced. Further, Verizon cannot let DISH combine with TMUS, as it will be virtually impossible to combine later on due to antitrust concerns.

May 13, 2015


VZ is looking to create a mobile video product that leverages its 4G LTE and FiOS assets. The article says:

…the deal announced Tuesday represents a bet on the future of media and technology as big U.S. telecommunications companies pivot into the lucrative business of TV and online video.

The largest U.S. wireless carrier has been steadily amassing technologies that will let it deliver video over the Internet. Verizon’s takeover of AOL…could help Verizon make more money from products aimed at young people, including a video service focused on mobile devices that is set to launch this summer.

Not only is VZ pushing subs onto its LTE network via conversion from non-4G to 4G smartphones, it is actively working toward driving an even greater amount of traffic via a mobile video service. According to ACG Research – a data provider for Cisco’s mobile data traffic outlook – operators are currently running their networks at dangerously “hot” levels…between 50 and 60% capacity versus a “safe” level of 40 to 50%. VZ approximately doubled its LTE capacity with deployment of AWS spectrum (XLTE), and claims it can handle any future capacity requirements with small cells, recently-acquired AWS-3 spectrum, the low-band Broadcast spectrum auction and other various technologies. I don’t buy it…

At the current projected rate of mobile data traffic growth – almost 50% p.a. thru 2019 according to Cisco – and assuming a constant MDT rate/sub, VZ would add the equivalent of over 600MM subs worth of traffic thru 2019. Yes spectrum will become more efficient over that time; but not without significant investments. VZ needs spectrum.

I am biased because of my large (and growing) DISH position – and frankly I’m growing tired of discussing it (as I’m sure anyone who follows me is as well) – but the AOL purchase only furthers my belief that DISH and VZ will ultimately end up together. Not only does DISH have significant capacity in the form of a 20×20 free & clear AWS-4 spectrum position – which VZ needs (desperately?) – but it has a full-fledged video product that VZ could leverage. Why attempt to create your own ‘skinny’ bundle via LTE & FiOS when DISH comes with a built-in video product?

I have followed this situation now for several years, so despite my bias I have a relatively objective view. It simply makes no sense how VZ is proceeding; and if it is not careful, it could end up scrambling 3 to 5 years from now.

April 30, 2015 

FT BIG READ. MEDIA (4.29.15)

  • 60MM NFLX subs; 41MM U.S.
    • What is the overlap of the 41MM U.S. subs with traditional PTV?
  • 10B U.S. streaming hours in 1Q15; represented ~43% drop in PTV ratings
  • Viacom ratings down 18% in 4Q14
    • Wanted TWC to expand footprint beyond current physical footprint
    • Could instead go after WBB in order to expand

How Cable Lost the Remote (WSJ, Andy Kessler 4.30.15)

  • One of Discovery’s highest rated shows (Naked and Afraid) viewed by 2.9MM out of 100MM households that pay for Discovery
  • 30 years ago Discovery exchanged 50% of the Company to TCI for inclusion in the “basic cable” package
  • Discovery charges $1.21 per month per sub according to SNL Kagan
  • ESPN charges more than $6, up from $2.50 less than 10 years ago
  • Average monthly cable bill is $64
  • TWX CEO Jeff Bewkes said less than 50% of those with a cable bundle watch sports
  • 30MM homes have HBO or Showtime; meaning 70MM do not
  • Mobile is wildcard
    • FB announced $1B of infrastructure spending, including Internet-beaming drones to help expand global internet access
    • GOOG has three mobile initiatives:
      • Project Loon – a network of high-altitude Internet balloons
      • Google Fi – mobile service created via renting S and TMO networks
      • Google Fiber – gigabit Ethernet
    • AMZN rumored to be working on a wireless network
    • GOOG owning T, and FB owning VZ or China Mobile not far-fetched

April 28, 2015

ESPN Sues Verizon (WSJ 4.28.15)

  • VZ basic bundle $55
  • ESPN to be offered in a separate tier
  • DIS claims violation of distribution agreement; FOX and CMCSA agree

April 19, 2015

United Breweries (NSE: UBL) 

UBL Analysis April 2015

UBL 2014 AR

April 16, 2015

(WSJ 4.13.15) TWX/Web TV article:

  •  TWX and DISH negotiated a deal that involved DISH distributing HBO via Sling TV
  • Risky for TWX to go around PTV given PTV provides bulk of regular HBO distribution
  • 10 to 15MM U.S. households not HBO subs, but were “persuadable”, according to a TWX-conducted survey
  • ~3% of current HBO subs would drop for HBO Now
  • HBO Now revenue to be shared with distributors
    • Historically distributors get ~50% of $15 retail HBO price

Key Takeaway(s): PTV market will not be a zero-sum game from here on out. As Ergen has outlined on calls, there is room for those that want a slimmed-down traditional bundle (Sling), cord-cutters that want ala carte (NFLX and HBO Now), and those that want the more economic full bundle. I have no data to back this theory up, but my guess is cord-cutting is exaggerated (greatly) by the above-average unemployment situation in the cord-cutters age group. Once incomes rise, $100 per month to have access to a wide range of high quality content suddenly is no longer out of reach…especially once the cost of distribution – broadband, mobile data, etc – begins to rise more in line with usage patterns. These are extremely undeveloped thoughts, as it is taking me awhile to fully wrap my mind around where the PTV market is headed…

April 9, 2015

  • (WSJ 3.31.15) TAP article 
    • US beer market: $100B
      • Craft beer 9%, up from 4.2% in 2008
      • MillerCoors 26%
      • ABI 45%
      • Remaining 20%???
    • M-C JV 44% of TAP profits
    • 10-person M-C JV BOD
      • SAB 5 want to reinvest for growth
      • TAP 5 want higher margins
    • Miller Lite and Coors Lite ~50% of M-C profits

January 8, 2015

  • (FT 1.7.15) O&G analysis
    • KKR bought Samson for $7.2B in 2012
    • Marked down to $.20 in June ’14
    • Samson 2020 9.75s ~$38.50 as of this week
  • (FT 1.8.15) CZR article
    • Proposed plan would leave CEOC w/ EV of ~$11B
    • LTM gross gaming revenue $387MM v. $597 in 2007; average daily room rate $182 versus $201 in 2007

January 6, 2015

  • (WSJ) Dish Sling TV announcement
    • $20/month with no contract
    • Available to non-Dish subs
    • Key partners include: ESPN, TNT, Food Network
    • Key missing channels: NBC, CBS, Nick, Fox Discovery
    • Dish proposes to relegate broadcasters FOX, CBS, ABC and NBC to separate tier
    • Allows only one stream per subscription at any given time
  • (WSJ) Apollo attempt to salvage CZR investment
    • Junior bondholders include Appaloosa, Canyon and Oaktree
    • 2013 asset transfer from CEOC undervalued by ~$3.6B
    • Restructuring plan currently in place would turn CEOC into a propCo/opCo REIT structure with senior bondholders owning the majority of the equity
    • Senior bondholders have approved the plan, junior bondholders have not

January 2, 2015

(WSJ) Frack sand article
– Silica Holdings still planning to grow next year and is not planning to cut jobs. Says ~70% of contracts locked in at attractive margins (one year or beyond too???)
– Industry GR originally projected at 20% in 2015 and 2016…
– Market might become oversupplied with roughly 10% projected supply growth..

– Just couple days ago I looked at Silica. Projected growth was enormous, with 2016E eps at almost $5.
– At a recent ~$25, trading at roughly 10x current earnings…
– …but don’t know yet about industry dynamics and if current pricing and margins are sustainable.
– Need to look at scenario where U.S. Shale production remains flat but fracking continues to use more sand per frac.
– Seems like a reach, but might be something here…

December 12, 2014

  • IBM
    • Closing this week at $155.60, IBM continues to get pounded. Option guru Joe Kunkle (@OptionsHawk) indicated today that puts on IBM continue to be bought en mass, and he believes the stock could pretty easily breach $150. No argument here…
    • In a nutshell, the “IBM is a broken business and the stock is going nowhere any time soon” is the same thesis in place for MSFT, AAPL and INTC at their respective lows. “Lack of visibility” is often the phrase used to describe these large-cap tech companies when they run into an operational soft patch.
    • IBM isn’t going anywhere. It has built enormous scale in the enterprise software space through its transition away from hardware, and though the medium-term may be bumpy as it makes the necessary investments to transition to the cloud, it will be a vital player in the enterprise “cloud” arena for years to come.
    • In my opinion, from the outside with limited information in hand, it appears IBM has built a culture of “profits first, growth second” with intense focus on returning cash to shareholders. This type of culture is not dissimilar to XOM, which operates with an extremely long-term horizon, and refuses to grow for the sake of growing.
    • I am not a tech expert, but from what I have read from the “Street”, it appears IBM really has quite the transition ahead of itself. This “dead money” future is represented well in IBM’s horrendous technical stock price set-up. While poor technicals will not preclude me from purchasing the stock, at just under 10 times normalized earnings, I do not yet believe IBM is cheap enough to establish a large position. Plus I do not have room at the moment (when is there ever room…). I would love to pick it up in the low $100’s…

October 20, 2014

  • adidas AG (ADDYY)
    • Previously mentioned in an FT Lex note and noted in this notes on July 12, 2014 – potentially interesting take-out candidate for VF?
    • News out that there is a potential buyer for the Company’s Reebok unit
    • Purchased Reebok in 2006 for $3.8B; rumored buyer is bidding $2.2B
    • U.S. market share was 10% and 8% for ADDYY and Reebok in 2006; now it is 6% and 1.8%. Though ADDYY has slimmed Reebok down via asset sales, the declines in market share are still quite impressive.

October 17, 2014

  • Shire PLC (SHPG)
    • Potentially interesting as a busted MARB play, as the $1.6B break-up fee – a not insignificant 1.9% of ABBV’s market cap – might entice ABBV back to the table, just at a lower price.
    • However, another article talked about SHPG having a $10B cash hoard post-break-up fee, which might put it in a position to be an acquirer.
  • Chesapeake Energy Corporation (CHK)
    • Sold properties worth $5.38B that will go directly toward reducing its $11.5B of net debt
    • Assets sold made up ~8% of production, but ~24% of EV
    • EBITDA ~$5.6B based on ~4X trading multiple and $22.41B EV
    • If PF EBITDA is $5.6B x 92%, or $5.15B, then PF EV is 20.60B based on the previous 4X trading multiple
    • PF Equity is then $14.48B based on the 4X trading multiple
    • Previous equity FV was $10.91B, thus $3.57B of value was created from this transaction
    • If FV EV/EBITDA is 6X, equity is worth $24.78B, or $37.20 per share
  • Cable unbundling
    • ESPN ~$30 per month
    • HBO > $15
    • Netflix $9 and going higher
    • CBS $6 ex. sports
    • I fail to see the value equation for consumers with breaking up the bundle unless…TV consumption simply declines. There is soooo much content in the current bundle, that some of it MUST go away if consumers are to truly pay less per month. TNT, TBS, ESPN, FOX, NBC, CBS, FX, Golf Channel, NFL Network, Showtime, HBO, Netflix….consumers are going to pay for all of that individually?
  • Google Inc (GOOG)
    • Revenue up 20% YOY in 3Q14
    • Expenses up 28% and CAPEX up 45%
    • If this stock starts getting hit on too much spending, it could become highly interesting very quickly. While operations are relatively opaque, my guess is that the ROI is rather high on reinvested earnings, even if the ‘R’ is not immediately visible. But have not done much work on it recently, so still need to dig in if the stock comes down…

September 30, 2014

eBay Inc. (EBAY)

  • EBAY splitting into two companies by 2H15.
  • Analyst on CNBC posited that EBAY Core becomes target for BABA, based on recent conversations he has had with investors.
  • With so much time until the split, more than likely opportunities will arise to take a position in the stock at levels lower than where the stock will open today.
  • CEO Donahoe’s interview with David Faber indicates just how untrustworthy entrenched management teams are – Donahoe takes full ownership, on behalf of the BOD, for the strategic decision to split PayPal after months and months of arguments to the contrary. More than likely this situation is a template for how the VRX/AGN deal will play out – eventually Pyott will cave, but then take full ownership of the decision, citing how well the two companies fit together.

September 29, 2014

Civeo Corporation (CVEO)

  • CVEO Corporate Presentation 9.29.14
  • Stock is down over 40% today on the news it will not convert to a REIT and will instead re-domicile to Canada, which will lower its tax rate to 25%. More than likely however, dramatically reduced guidance for 2015 is what is driving the decline.
  • Projected 2014 Adj. EBITDA is approximately $314MM at mid-pt of guidance, down from $429MM in 2013, and 2015 is projected to be “materially” lower. So much for a “stable” REIT-friendly business model.
  • Assuming 2014E results are “mid-cycle” (whatever “cycle” even means for an industry at the end of a huge secular boom…), using 2013 D&A and interest expense, and a 25% pro forma tax rate, mid-cycle earnings are approximately $95 million. At today’s market cap of approximately $1.5B, the stock is trading at 16 times earnings. For an asset with earnings falling off a cliff, 16 times appears rather fully valued…

September 27, 2014

Barron’s discussing upside to TAP
– Says US profit margin is half of ABI’s. Seems hard to believe that buying out Miller’s stake in MillerCoors would double margins…but perhaps
– Street analyst sees potential $100 take out price by SABMiller in order to fend off ABI.

September 25, 2014

– WSJ blurb on TNT
– Could potentially be an interesting busted merger play. Not sure if UPS would be able to bid again due to anti trust concerns. But perhaps Deutsche Post (?) could bid?
– The stock is 50% lower (or more) than UPS’s bid. Unlike AVP, which is way below its takeout offer but with a broken business model, TNT appears to have fixable operational issues. Still need to look into it.

September 24, 2014

Transocean LTD (RIG)

Lots of discussion going around regarding the rapid atrophy of the drillers, coals and SHLD. I started to take a look at RIG and did not make it past the financials in the 2Q14 10Q. Based on the stock price action of RIG, this is not simply Mr. Market overreacting to cyclical concerns – something structural is taking place. As such, I do not believe it is appropriate to value RIG on an earnings power basis – there is simply no way to ascertain what normalized mid-cycle earnings are for a company in what appears to be structural decline. The only way I would be even remotely interested in RIG is if it were trading at an absurd discount to a conservatively calculated tangible book value figure while breaking even on the cash flow side. As I said, I did not make it past the 2Q14 balance sheet.

After giving RIG full credit for cash and current assets, haircutting net PP&E by 25% and subtracting total liabilities, RIG is left with $7.3B of tangible book value, or $20 per share. At best, tangible book value is $36 per share giving fully credit for net PP&E. With the business in structural decline, I do not believe net PP&E is worth full book value.

I am not an UDW drilling expert, thus I could very well be, and likely am, dead wrong here. But for me to get interested in this 52-week low “bargain basement” situation, I need a much wider discount to liquidation value. See you at $10, Mr. RIG?

RIG Analysis September 2014

August 29, 2014

– WSJ: studios take in 25 cents per box office dollar in China; 50 cents in the US

August 16, 2014

OTC Property Company A

  • Net lease revenue: $3.66 million
  • G&A $1.104 million
  • Shares out 6.6 million
  • REIT FVPS @ 15X EBT: $.388 x 15 = $5.82
  • Gross terminal FV $35 million
  • Net cash $2.95 million
  • Debt $17.2 million
  • Net Terminal FV: $3.14 per share
  • Total FVPS $8.96


  • REIT EBT $3,666
  • D&A $206
  • Est. MCAPEX $50
  • Est. AFFO $3,822
  • REIT FV PE 17.5X
  • REIT FVPS $10.13
  • Terminal FV $21 million
  • Net Terminal FV $1.02
  • Total FVPS $1.02

August 5, 2014

Synchrony Financial (SYF)

– 27.5% ROE
– 85% GE ownership
– MS FV $36
– IPO $24.50
– Segments: retail card, payment solutions and carecredit
– 34% share of PL cards in U.S.
– sticky customer relationships; average life 15 years

July 30, 2014

– UPS daily package volume up 7.4%
– US revenue up 5.2%
…economy is strong, to say the least. Track UPS results more closely going forward…

– Flipkart, India Amazon essentially, raised $1B from investors including Tiger Global Mgmt, valuing Flip at $7B
– believe they can be $100B firm within five years
– IPO not a priority NT
– IPO maybe at $50B valuation? If $100B target is supported by profitability, then buying in at a $50B IPO valuation wouldn’t be terrible.

– Sprint down -30% on the year, granted from a high level
– just don’t understand how a TMO deal goes through…
– can’t help but wonder if DISH isn’t waiting in the wings to pick up the pieces….

– Morningstar FVPS est. for ESRX $89 – p/fv 78% under $70 per share. Really no reason not to own this thing.

July 29, 2014

– Athabasca Oil trading at 7 month lows on the delay of sale of Dover oil sands project to China National Petroleum sub for $1.23B. (WSJ report)
– no sale likely baked in at current levels…

– (pg. 53 7.26.24 Economist) – Siemens
– thinking of listing its healthcare unit
– 11% ebitm, below 15% GE industrial
– 18% of revenue makes no proft…which means ebitm is 13.4% on profitable revenue

July 24, 2014

McDonalds (MCD):
– Lot of negativity around this stock due to poor sales performance
– earned $5.55 in 2013.
– were MCD to break up ala ackmans original plan, worth probably 30 times earnings, or $167
– need to look into it, but Japan segment may be weighing things down
– gosh, unbelievably tempting stock to load up on and not worry about for years

Facebook (FB):
– reporters YOY rev GR of 60%
– wondering if FB won’t turn into the next Yahoo! five years from now once growth slows and the market turns against it
– some quick valuation:

– LTM rev $10B, normal NPM 30%
– 5y GR 30%, 6th yr 15%
– FYE 5 PE 20X
– FVPS at 10% COE $61.90 today

– just don’t see the long term moat but very well could be wrong
– Ned Davis Research 2013 survey of Echo Boomers indicated 90% of over 500 surveyed use FB!!
– if they keep using overvalued stock to build the moat, network effect could be powerful
– tough to see it getting back down in the $30s, but would be interesting there.

July 23, 2014

Danone SA (DANOY)

– WSJ reports Danone is undergoing a strategic review of its operations in order to boost growth
– Four divisions: Early Life Nutrition (EUR4.26), Fresh Dairy Products (EUR11.79), Medical Nutrition (EUR1.34) and Bottled Water (EUR3.9)
– Market value EUR36B
– Exploring sale of medical nutrition segment
– Might be worth 20x €3.00 in a sale, or €60. Currently at €56.49


– DANOY receiving more press about the need to buy or risk being bought. I would much prefer to see them sell out to a larger player, versus buying MJN at record high valuation levels.

– From a “technical” perspective, a share price in the low $13’s, which was the 52-week low hit back in early February ’14, would be a great entry point.

EMC Corporation (EMC)

– net EMC mkt cap $26.34B at 7.23.14 close
– check what earnings ex vmw look like…
– Elliot may finally be the catalyst required to unlock hidden value…

July 12, 2014

– FT Lex article on Addidas. Stock down -21% this year and trading at 17X forward earnings. Why wouldn’t this be a good take out candidate for VF?

Costco (COST):
– Huge moat with razor thin margins and massive inventory turnover
– MS sees SF growth of 4% pa over next decade
– currently trades for 23x 14 earnings
– MS believes worth 25x – way too aggressive IMO, given a straight line projection in growth with no recessionary interruption.
– would love to consider buying at 15x, as likely worth 17.5 to 20 long term

July 11, 2014

American Tower (AMT)
– MS projects AFFO growth from $1.5B in 2013 to $3.1B in 2018
– largely driven by massive EM expansion potential as 3/4G investment rises
– compare and contrast MS case with #carsonblock i.e. #carsonblockhead

VF Corp (VF)
– MS potential takeout candidates: LULU, PUM.DE, BBG.AX, Fila, GEO.MI, MONC.MI, CROX, SKX, WWW,

– Supposedly has had failed discussions with Billabong…hmmm…

– IMO, questionable LT outlook for Rail margin expansion to 65% OR. UPS/FDX likely better play
– deep dive UPS and FDX – MS underestimating those moats vis a vis the Rails? Rates FDX a narrow
– logistics might be maturing? Time for consolidation? Given huge fragmentation outside of CHR and EXP perhaps not much incentive to merge with each other
– perhaps TNT a target once more?

July 10, 2014

– look into PREPA
– bonds under $.50 I believe
– is MBIA attractive again?

July 9, 2014

– Samsung trading at 7 times earnings according to wsj. Net of cash??

July 8, 2014

Wal-Mart (WMT)
– looks like CEO is not accepting low growth status
– is online investment worth it when going against AMZN?
– potential shareholder revolt in the cards, as WMT shareholders far different than AMZN

Yahoo! (YHOO)
– lots of concern over Jack Ma’s conflicts of interest
– yes a concern, but Chinese law does not allow foreign ownership of certain assets
– alibaba far too large and valuable for its founder to impair capital market relationships, IMO
– if SoftBank exited, I’d be concerned
– I’m sure during Tencent’s huge stock price boom there were more than enough governance concerns…

July 7, 2014

– investment plan credible?
– has arg govt changed attitude enough for it to trade at 5X?

Fosun International
– china BRK
– potential “quality” way to play China
– mgmt potentially risky due to “tide” seeking

– per MS, SAB value neutral at 17x
– look for potential sell-off if over 19

– potentially late to the party, but Ambev potential take out candidate by ABI since already consolidated
– MS estimates BRL 19 FVPS


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