Someone likes their German wines - pretty certain 90% of readers won’t know what Sekt is!
Hi Albert Quo: I'm not going to disagree with your assertion that capitalism today has got structural issues - I've written for the AFR on this topic and some white papers you can read on our website. But I'm also an optimist. There's a reason why paying people to donate blood doesn't see a rise a in blood donations (which if everyone was selfish, you would expect) -humans are social animals and like to act and believe in a higher ideal of the group. I think there's enough evidence that says groups can change norms for the better.
Hi Jason Smith: An excellent point on the Mungerism and whilst we are a not "buffet-phile" investment house, I have huge admiration for Charlie and often use that quote! Yes, if there is to be new rules, they need to set the incentives correctly. Whether the RC has the level of knowledge to structure future rules correctly, I'm not sure, though the team's depth of knowledge of a sector that they are not from has been impressive thus far.
Hi Patrick: Thanks for your thoughtful feedback. Likewise, I have to disagree with you. Of course groups consist of individuals making choices. Most of these choices are not clear cut, like assault or something of that ilk (Though the provocative book "Hitler's Willing Executioners" would argue even the most abhorrent behavior is rationalised in groups). They are culmination of little choices. I think that better answers the perennial question: "why do good people do bad things?".
Thanks Bruce - as we say, use capitalism for the outcomes you want to see rather than bemoaning the outcomes. Unfortunately the passive nature of superannuation for a lot of people (it's automatically deducted at a set rate and invested for a date that seems a long way away) makes it feel like people can't effect the change.
Ron: Yes, the article was already getting to 1200 words without a valuation discussion! From a shorting perspective, a stock Being overvalued doesn't mean it's a good short, it does though mean if something goes wrong, the outcome will be skewed in your favour as the distance to fall is larger than usual. Clearly valuation in both earnings and Percentage of FUM was on the high side going into this episode which is exacerbating things on the downside.
George & Trevor: Trust is why I raised the Babcock and Macquarie examples, as all Financial services are trust related. After all, the industry doesn't produce anything "material" the way a factory does. I don't think it's a lost cause for trust, just a long journey back. But in the long history of companies, 2-3 years isn't that long. And I'd argue if they pass through this, as we've seen with Macquarie, the issues are buried.
ALAN CTHGPRO: Agree. Surely in the many assets there are some where they are sufficiently advanced. Or even better - sell some of the disputed assets. They may take small negative marks, but it's small beer compared the decline in their market cap.
To Wentworth Securities: Hadn't added that to the list of flags, but it never looks good. That said, senior managers do have needs outside of work and the stock was deep in the money for lots of them. Could be unlucky timing, just adds to the list unfortunately.
Thanks for all the comments, quite a few here so will try and address them. Firstly to Damien Parker: Whilst it is logical what you propose, if I was short I would point out this is like a defendant getting to chose their own Judge! The same applies if Glaucus got to chose the valuer. The only "clean" outcome is someone fronts up with cold hard cash for an asset. End of dispute for that asset. Now lets also be clear - this is a risky strategy, because if they don't get bids near their marks, the auditors will not let them leave the old marks, as the auditors are then open to being sued. I'm not saying these are easy choices to make - just pros and cons to each option. Doing nothing is also not risk free (redemption risks or being bid for at a cheaper price than you think the business is worth, etc). But that's why Board of Directors get paid -for times like this to earn their money.
Montier has written some good stuff on it. Though I would say doctors and Fundies have another thing in common: admitting negative feedback doesn't enhance client relationships. No one wants to see a doctor with no confidence who tells you about their mistakes. Likewise with clients choosing fundies.
Hi Justin - good quote. And why it's more an illustrative example. Though there is a rather scary chart that overlays a similar study comparing doctors and weathermen (hint - it's not the weathermen who get exponentially more confident).
Hi Allang - yes that's the million dollar question! And why markets are harder than a horse race. Because to paraphrase Keynes, picking the most beautiful isn't how you win, it's picking the one that others think is the most beautiful will win. So the bits of information depend on what type of investor is in there. Growth investors care about sales; value investors care about cashflow and debt, etc. But you're off to a start if you're at least aware that you will tend to make up your mind after a few pieces of information.
Thanks for taking the time to read and comment Eric. Always appreciate feedback. It's one of the ironies of Investment Banking/ Broking (and Management consulting ) that MBA's with little real world business experience proceed to advise on how to run a business ! I always try to remember that when I'm with any management team irrespective of my view on the stock.
Hi Graeme, No, you're not being picky - you're right. I was waiting for and expecting someone to point it out! The first draft actually had mean written in it along with a chart of mode, median, mean on it to show graphically what skew does. Feedback was that a 700 word blog isn't the place to try and do a 101 stats course and just go with the term most people understand.
Hi Rick, Thanks for your comment. Whilst true that options can see FUM increase, they also enable a buyer to move their return profile around to suit their personal preferences. Your view on where the fund is going determines your view on what you should do with an option. If you think the option will expire worthless you should buy the stock at a discount to NAV and watch the discount close as the option value decays to zero and you got your asset cheaply. Conversely this strategy would be inadvisable if you though the share price was going to rise strongly as the dilutionary effect drives a larger discount to NAV. Horses for courses.
Hi Peter - good point. I think the oceans acidification side effect of CO2 changes plus in the reefs case the bleaching from warmer water has gone relatively uncommented on. Thanks for raising it.
Thanks Graeme - totally agree that if governments moved it would happen quicker by adding pricing signals or simply "good regulation" (it does exist) - like the banning of CFC and HFCs in refrigerants or NOx SOx cap and trade model.
Jimmy - that takes the cake thus far on the car front!
Thanks Jordan - glad in amongst all the Trump articles we were able to add something that was new(ish).
Thanks - I thought we had a well constructed bull case.
Hi James - the short answer is no, we didn't see it coming. A friend who was close to the situation, called us in early February when the stock was around $17 and spoke about it. We then had to analyse the IPO docs to make sure we were comfortable with owning shares in the business, which takes time, hence why our entry isn't immediate on the chart in the blog. But going forward we have set-up alerts to look for more situations like this as they unfold globally, but at the end of the day we also need to be comfortable owning and liking the stock.
Apologies if anyone clicked through and the link didn't load the report directly this morning, we had an hour where the server wasn't directing correctly. This is now fixed.
Hi Robert - the guys at Livewire asked me to explain our chart, which I have just realized didn't pick up the label correctly in Excel. Firstly, the (admittedly poorly labelled) red bars are the first difference between each of the losses in the blue bar of the max drawdown. The significance of this is to show that not all losses are equal - i.e if all losses were about the same that line would be near zero. It shows how the tail accelerates to what I referred to as "non-linear" in the article. The conclusion for investors is that a process that involves cutting out the very end tail saves you most of your losses as the distribution is skewed. Hope that makes some sense.
Good question. Most likely they do one, as they appear to be desperate to prove they can do it. Beyond that, time and deflation is likely to catch-up with them. So highly likely 1 rate move, highly unlikely - more than 4. Beyond that it's hard to be precise.
I learnt the hard way many years ago that Australia is a small market and Journos that go to print with stories tend to be on the money more often than not. On WES - no real opinion. Many moving parts and not a clean play on the short side. Clearly the market darling where the long only Aussie funds are hiding for their retail exposure, but given Like for Like sales growth is intact, wouldn't have a bet either way for now.
You mean a Bid or the Masters changes? Clearly bids are the biggest risks to any short thesis and whether our thesis is right or wrong, it doesn't matter - we lose. Bid rumors now will likely provide a floor in the $26-28 range. Assuming there is no bid, we turn back to the underlying story. To be honest, in my opinion, Masters is a sideshow ultimately. Even assuming its worth nothing (which is unlikely) its $3bn. The market cap of WOW is $34bn, so less than 10%. What's much more important is the sensitivity table in there to Food and Liquor margins, which shows lower margins have a much greater impact to the DCF valuation. What Masters is, is a symptom of a poor decision making process -call it the runny nose, not the virus (if I'm to torture an analogy!)
Looks like we "Bottom ticked it" with our piece! I'd say KKR are thinking (if it's true) the same as what David Errington wrote in his upgrade note from Merrill Lynch last week - cut that business, or at the very least stop spending a few hundred million of CAPEX on it to increase free cashflow. You won't see it in EPS, but improves sustainability of of overall business if they need to lower prices in the Food division. Then assess chances of rehabilitation. My issue with the buyout idea is, the aim is generally to buy UNDEREARNING businesses not OVEREARNING ones. But hey, who am we to tell KKR where to spend their money? But we've covered half of our short this morning anyway - as per last paragraph of note, without more downgrades it is hard to go lower in the short term. Better to walk away with a good profit and reassess later.
Thanks James, hopefully the readers will now know the A's from the H's