Sunday, February 21, 2016

A Comment from "Anonymous"...

I just noticed this comment on a prior post a few days ago......I would normally just reply within the thread, but this comment was so thought provoking that I felt it warranted a post of its own......here's the anonymous comment on "Oh what a tangled web we weave...":  

2 points: 

- you are using the stats for "enterprises above designated size" which only counts companies with sales more than a certain figure, which I can't remember. The relevant data point is that for the full year 2015, sales recorded at enterprises above designated size accounted for 54% of total retail sales
- the most straightforward data point, instead of us trying to guess how big China's ecommerce sales are, is from NBS as well. in 2015, China ecommerce sales were 3877 billion yuan and BABA's GMV was 2950 billion yuan. So BABA's market share is 76% of China's ecommerce, which makes sense given its ubiquituity

http://www.stats.gov.cn/tjsj/zxfb/201601/t20160119_1306103.html 

First, I'd like to thank Anonymous for calling my attention to the January 20th, 2016 Press Release re: China Retail Sales published by China's National Bureau of Statistics (NBS).  This is valuable data and I was unaware of its existence until Anonymous pointed it out to me.  Whoever you are....Thank you!

Next, I'll assume that Anonymous has a strong financial background, has knowledge and understanding of the NBS Publications (since he/she has sent this to me) and is fluent in Chinese (the link he/she provided was the Chinese version of the data)

Fortunately, there's an English version of the Press Release posted on the NBS site as well.  I'll refer to that document to avoid any translation mis-steps.

English Version
http://www.stats.gov.cn/english/PressRelease/201601/t20160120_1307123.html

Also, thanks to Anonymous for the 54% metric....I was looking for that and I didn't see it.  The Press Release shows that Retail Sales for "Enterprises above a designated size" looks to be 49% of the 2015 total "Physical Goods" (133,891/268,621) so I'd suggest that this is a more appropriate benchmark.

So now...let's examine the numbers in a little more detail....

Below is the statement and the full table Anonymous was referring to re: Alibaba's  market share being "76% of China's eCommerce".  Id' suggest that, based on the numbers, Alibaba is even more dominant than Anonymous had suggested..

In 2015, the national online retail sales of goods and services was 3,877.3 billion yuan, increased 33.3 percent year-on-year. Of which, the online retail sales of physical goods was 3,242.4 billion yuan, increased 31.6 percent; the online retail sales of non-physical goods was 634.9 billion yuan, increased 42.4 percent.

Given the above, since Alibaba, according to their filings, press releases and investor calls only participates in the sale of "physical goods", they actually have a  91% market share (2.950T/3.242T) of all eCommerce in China.  Again, based on these figures, Alibaba is nearly the entire eCommerce ecosystem in China.  Remarkable to say the least.

Here's the entire table contained in the NBS Press Release:






















Moreover, when we compare the Alibaba GMV in 2015 to all Retail Sales in China, in the physical goods categories that their filings, investor calls and press releases purport that they participate in, we see that the Alibaba's market share is the equivalent of 44% of all retail sales in China.  In other words, nearly half of all clothing, shoes, lipsticks, shampoos, refrigerators, TVs, stereos, desks, computers, couches, chairs, beds, phones, etc. are sold and delivered through the Alibaba ecosystem. Again, this is remarkable.





















Alibaba's Competition

Now, let's take a look at the rest of the eCommerce businesses in China.  In the fall of 2015 China Internet Magazine released it's list of "Top 100" eCommerce businesses.


Observations on the above:
  1. As we mentioned above, Alibaba is 91% of all eCommerce in China.  The rest of the businesses are relatively insignificant.  Of the top 100 eCommerce businesses, the next largest ecosystems are Baidu (Qunar & Nuomi)  and JD.com each about 6% of Alibaba's reported GMV.  To the casual observer, it might appear that the Chinese consumer just doesn't seem to be all that excited about any of the other non-Alibaba eCommerce business.
  2. In just four years the cCommerce Industry in China has grown from virtually "non-existent" to 44% of all applicable category Retail Sales in China.
  3. Interestingly, with the exception of Suning (an Alibaba "Investee"), there are no "brick & mortar" retailers selling a material percentage of their wares via proprietary eCommerce sites.   As an aside, in the US, once eCommerce took off, traditional retailers, Walmart, Best Buy, Apple, Home Depot, CVS, Lowes, etc. jumped into the eCommerce fray to prevent the erosion of their traditional revenue stream. This hasn't happened in China.  Presumably the managers of the "brick & mortar" retailers felt comfortable letting 44% of their category revenue walk out the door in just a few short years. Guess they just didn't see it coming?
  4. Eight (8) of the Eleven (11) largest eCommerce businesses in China, the four (4) Alibaba Businesses (Taobao, TMall, 1688, Suning) JD.com, Amazon China, Baidu (Qunar & Nuomi) and VIPShop are all listed on US Exchanges.  Sadly, it seems the hard working people of China won't be able to invest and participate in this eCommerce miracle, reaping the huge financial rewards from the certain, guaranteed success of these businesses.  All the wealth will accrue to US Investors.  The Chinese people will learn perhaps the hardest lesson of capitalism, that the rich do indeed get richer. Frankly, I just can't understand how China's leadership could let this golden goose slip away.  (Author's Note: for my Chinese readers using Google Translator or some other tool, the above bullet point is what we in the United States refer to as "sarcasm".)  
  5. Finally, when we compare the verified GMV (per SEC filings and Company Press releases) of the eleven (11) largest eCommerce businesses, we see that the GMV of these businesses actually exceeds the comparable total GMV reported by the NBS.  In other words, for the numbers to balance, the remaining eighty-nine (89+) businesses would have to report negative GMV of 374 Billion Yuan (US$58 Billion).  Unfortunately, like anti-matter, negative GMV (sales) doesn't exist on this planet. 
Another Odd Phenomenon

With the meteoric increase of eCommerce in China, you'd think we'd see a bit of what we might refer to as the Walmart/Amazon effect.  When a sea-change competitor enters a market we usually see dramatic shifts in the landscape.  For example, when Walmart drops a Super Center in a small community, Mom & Pop commodity-type retailers (hardware stores, department stores, grocery, etc) in a 20 mile radius suffer significant revenue loss and/or eventually go out of business.  Moreover, an eCommerce business like Amazon increases pricing/margin pressure. "Why should I buy a coat, hardware or a home theater at the local store when I can get the same merchandise on-line for 20% less?"  Industry Sales don't necessarily increase, they are shifted from one marketplace/competitor to another.  Brick & Mortar businesses must either adapt to the new paradigm or suffer accordingly.   (JC Penny, Sears, Barnes & Noble, Circuit City, Blockbuster, Borders, to name a few)

Interestingly, even with the huge expansion in eCommerce, we've not seen anything near a slowing or pullback in the growth of Brick & Mortar retailers in China.  According to Statista, in 2014 there were 87,652 retail businesses in China, compared with 58,471 in 2011, a 50% increase (about 15% per year) in just three (3) years.  I've seen nothing in the financial press reporting wholesale realignment/closing of retail units in China, despite 44% of all Retail Sales transitioning to the Alibaba ecosystem where presumably no storefront is needed.  If Alibaba didn't exist would the Retail Business growth rate be 30% per year even though the Disposable Income growth rate has been roughly 10% per year since 2011?  Anonymous, if you have anything at all on this topic I'd appreciate it if  you'd share it with me.




The Thesis....

Based on the above, I'll repeat the theme/thesis I've been describing in the blog for more than a year.

Is it more likely that Alibaba is the eCommerce miracle it claims to be, defying economic gravity, with published un-explainable, unverifiable metrics that fly in the face of logic, reality and nearly every published data point out there?  Perhaps the NBS data is just wrong?  Perhaps the house-of- mirrors NBS Survey data (self reporting with a systemic, political incentive to mis-report) is divorced from economic reality and Alibaba's meteoric growth is accurate?

Or:

Is it more probable that Alibaba and the entire "China Dream" is the greatest financial fraud, perpetrated by US Investment Banks, on naive, trusting US Investors in the history of finance?

Again, this is just a thesis.....I'm not directly accusing anyone of anything....just asking a few questions.

Finally, Anonymous, if you have anything else you'd like me to review please pass it along.  I'll be happy to take a look at it.  Again, thank you for sharing.


Additional Materials/Links

100 Top US Retailers
https://nrf.com/2015/top100-table

100 Largest E-Commerce Businesses
http://www.chinainternetwatch.com/14911/top-100-e-business-companies-q3-2015/

Caixin Article - 11/2/15
Today, Alibaba's Tmall controls 58 percent of the market for retail e-commerce sales in China, according to iResearch Consulting Group. JD.com holds second place with a 20 percent market share, while Amazon is a distant eighth with 1.1 percent.
http://english.caixin.com/2015-11-02/100869131.html

China Internet Watch - eCommerce
http://www.chinainternetwatch.com/14911/top-100-e-business-companies-q3-2015/#ixzz40Z2dsYBu

Amazon's Ecommerce in China is a rounding error on the 10k.......Caixin says it's about 42 b RMB or 1% of total China eCommerce.
http://www.sec.gov/Archives/edgar/data/1018724/000101872416000172/amzn-20151231x10k.htm

Dianping - MeiTuan Merger
http://finance.yahoo.com/news/alibaba-sell-stake-meituan-dianping-report-080342153.html;_ylt=AwrC1zHxV8ZWyzMA8RaTmYlQ;_ylu=X3oDMTEyNmo2aW9rBGNvbG8DYmYxBHBvcwMyBHZ0aWQDVklEMDVfMQRzZWMDc2M-

Baidu Financial Results - SEC Filing - 9/30/15
http://www.sec.gov/Archives/edgar/data/1329099/000119312515359040/d93806dex991.htm
Note: that the term GMV did not appear in the Baidu SEC filings until Q2 of 2015.

Retail Businesses in China
http://www.statista.com/statistics/277807/number-of-retail-companies-in-china/

China Disposable Income
http://www.statista.com/statistics/289186/china-per-capita-disposable-income-urban-households/



Tuesday, February 16, 2016

"Window Dressing".....

Isn't "Window Dressing" a nice, fun, cute term?  In the good old days it used to mean that financial managers would sell off their mistakes just prior to quarter/year end, keeping the details of their folly off the financial statements, burying the minutiae in "other income/expense" and perhaps include a cryptic footnote or two describing, in no great detail, the relatively immaterial events comprising the need for the aforementioned "Window Dressing" in the first place.  Investors and shareholders wouldn't see (or apparently care) how misguided some of their decisions had been during the accounting period.  After all, that's what the footnotes buried deep in the financial statements were for. The footnote disclosure would meet the bare minimum financial reporting standards and nobody, unless they were forensic accountants, would be the wiser.  In any case, in the good old days, the transactions were closed, finalized, completed and relatively small.  All would be right with the universe.

As most of you know, my game plan for successful, long term investing is as follows:

1.) Look for huge, unexpected events.
2.) Investigate and try to understand these events as best as possible.
3.) Adjust holdings/strategy accordingly.

Given the above, I ran across this curious schedule from the NY Fed in a Yahoo! Finance post from Jared Bilkre which I would consider a "huge unexpected event".  Apparently, on 12/31/15 the FED sold $475 Billion worth of collateral (Treasury Repos) to the banking system "overnight" to be "returned" the next day.  This figure was $306 Billion more than 12/31/14 and roughly $375 Billion more than the historical average daily supply required by the US financial system.



The question that immediately came to mind was "Why does the demand for Treasuries accelerate so much at quarter and year end?"  The US financial system apparently requires $475 Billion, nearly the equivalent of the market-cap/value of Apple, in Treasuries, overnight on 12/31/15?  Hmmmmmm.....

If you'd like to learn about the Repo Market I've attached a number of links which describe accounting and process.  For the purpose of this post, let's just say Repos are the life blood of the banking system, providing cash in exchange for collateral as needed. The banking system can't function efficiently without it.  It's fascinating and extremely complex, but a full  understanding isn't necessary for what we're talking about here

That said, here's a top level diagram from the NY FED that describes the market structure.


Again, there's no need to fully understand the above for the purposes of this post.  There are two "clearing banks" (JPM and Bank of NY Mellon), 163 firms with direct access to the FED Repo Facility and thousands of Financial Institutions, Funds and Investors providing/receiving Cash/Collateral within the system.   All of these "counter-parties" can exchange cash for collateral or visa versa as their needs/desires dictate.  There are, of course, transaction costs and "haircuts" which generally increase based on the perceived riskiness of the collateral. I've included the diagram only to illustrate how collateral is exchanged for cash, at lightning speed, throughout the financial system

Now, let's have a little fun with Repos and see how they might apply to "Window Dressing" today.

Hypothetical Phone Conversation - Early December 2015

The following hypothetical phone conversation may have taken place between a Money Manager (aka Mike) and a Banker (aka Dave) sometime in December of 2015.  I've included the translation output from my the Dick Fuld-Banker-Speak Translator (BST) in italics below the actual dialogue:

Banker (Dave) "Hey Mike, Happy Holidays, how's it going, hope all is well!"
BST "This guy is a mess.....I'm surprised he's not out of business by now..I half-figured that his phones would be shut off."

Money Manager (Mike) "Thanks for calling Dave, what can I do for you?"
BST "Dave is a pain, but he knows his stuff, I wonder what he's up to now?..."

Banker (Dave) "I just wanted to let you know that I've been working with a number of money managers to help them clean up their financials as we approach year end.  Our Program is getting rave reviews and we'd like to open the program up to you if you need it."
BST "Mike would be a moron to turn this offer down.  I know he's got a balance sheet full of il-liquid junk.  If he discloses it, his investors will bail and he'll be the next Third Avenue."

Money Manager (Mike) "Well Dave we really don't need to clean anything up, we're rock solid, but just for my education, how would your program work?"
BST "Geeeezzz .....I hope this isn't BS.....I've been looking for a way out of this mess for a while now.  I've got $100 million of absolute crap I can't get rid of on the books and my Investors are going to blow a gasket if they figure it out.  I don't want to end up like Third Avenue."

Banker (Dave) "It's pretty simple, it's a Repo and a reverse Repo, we buy some of your less liquid assets and exchange them for Treasuries.  Instead of reporting the value of the troubled assets on your financial statements, you report the same value as a loan payable to us and Treasuries.  No gain or loss is recognized as of 12/31/15 and the transactions and ownership of the securities reverse the next day.  Everything goes back to the way it was.  Your fees and financing costs are minimized since it's just an overnight deal. You just need to provide some footnotes per FASB 140 and ASC 860. In other words you are "renting" a tiny chunk of our fortress-like balance sheet for a day. We've got unlimited access to the FED Reverse Repo facility, $2 Trillion dollars.  I can send you our summary and opinion from our lawyers if you'd like.  Everybody is doing it.  I'm just trying to help.....What could possibly go wrong?."
BST  "I'm going to get this knucklehead to pay me some significant fees for a virtually risk free overnight loan.  He's screwed.  It's either pay me or liquidate.  We paid big bucks to find some obscure dink-water lawyers and accounts to come up with a favorable opinion on this thing....but hey, I'm just selling it.  Nobody ever goes to jail for this stuff.  Easy money baby...."

Money Manager (Mike) "Really?....I don't think we need it but it sounds interesting, yes please send me the documents & I'll have my lawyers and accountants look them over...this isn't one of those Lehman "Repo 105" scams is it?  It's legit? Right?
BST "I don't trust this guy as far as I can throw him....but he seems to have an answer for everything.  I hope this jerk doesn't screw me over somehow."

Banker (Dave) "Of course it's legitimate.  As I said, this program absolutely conforms to the post Lehman FASB rules for Repo Accounting and satisfies the "control" requirements of ASC 860."
BST  "It's actually the same as Repo 105, but we're changing the contract to meet the risk and control requirements of ASC 860, but that shouldn't matter to you.    Besides the FED has our back, we've got virtually unlimited overnight credit."

Money Manager (Mike)  "So we do the Repo on 12/31/15 and everything goes back to the way it was the next day? Having all of those il-liquid assets on your balance sheet at year end doesn't hurt your Capital Ratio?  And we can do it again on March 31st? June 30th?"
BST  "Are you kidding me?  I never have to disclose all of the crap on my NQ and in my Financials?  I've got some time to dig out of this mess?  You are the Man!"

Banker (Dave) "Yes, for you Mike, it's an open facility.  I'm not making this offer to everyone, just our best clients.  Our Balance Sheet is your Balance Sheet.  We're so big and fortress-like that these Repos are a rounding error on our balance sheet.  They don't even need to be disclosed in detail.  We just report a Lump Sum "Level 3 Assets".  Access to the FED does indeed have it's benefits  I'll send you the documents"
BST "I'll make this offer to any desperate dufus who'll pay my gigantic fees and accept my huge margin/haircut requirements.  Our accountants and lawyers will find a way to bury this.  They always do exactly what we tell them to do. Otherwise we'd find different accountants and lawyers."

Money Manager (Mike)  "Sounds great....Looking forward to working with you...talk to you soon."
BST  "You better not be screwing with me...." 
Click....

Banker (Dave)  - Dialing Phone "Hey Mark.....how are things going at the XYZ Fund....do you have a minute?"

Repeat the above call thousands of times at dozens of Banks/Dealers .......

So here's a diagram of how the above described transaction might work as well as what the Balance Sheet and NQ might look like for Mike's Fund after Dave the Banker gets a hold of it:






Of course, in "real life" the descriptions above won't be as obvious as "Il-Liquid Junk" and the haircuts, interest rates and fees would be applied to the transaction as market conditions dictate.  The above simply gives us an idea how Dave and Mike might hypothetically "Window Dress" their year end numbers.  Lehman brothers did the same thing, until, of course, they couldn't.  Isn't Window Dressing fun?  

In "real life", the terminology would look like cryptic codes that only industry experts would know (or should know) are "il-liquid Junk". Below are a few footnotes from the Third Avenue filing.  Note how the words "restricted" and "pledged" are used in the footnotes.  These may or may not be buzzwords for "It's on our balance sheet but we don't own it".  The point is, it's getting more difficult to tell.


(k)A portion is segregated for future fund commitment.
(l)Includes restricted cash pledged to counterparty as collateral management for forward foreign currency contracts.

(e)
Security subject to restrictions on resale.  At July 31, 2015, these restricted securities had a total market value of $92,323,647 or 4.40% of net assets of the Fund.

For reference, I've also posted (below) links to FED docs showing the securities that qualify as FED collateral and the corresponding average haircut each security generally requires. Note that there is an active, liquid market for each of these security classes.  The higher the perceived risk of a change in value, the greater the haircut. (margin).  There are, of course, no "Level 3" assets on the FED's list.  Level 3 Assets  (Which. in my opinion, usually should have been written off to zero ($0.00) are trapped, albeit for a day, on the Balance Sheet of the Big Reliable Bank (BRB).  But in most cases, this is dismissed as a rounding error because it's only a small fraction of the BRB assets.  Everyone makes mistakes...right?

So what?..... 

So there might be some mutual funds that are monkeying around with their financial statements.  So what? Window Dressing has been going on for years.  The FED put the Repo/Reverse Repo facility in place to provide liquidity and ostensibly make the financial system safer.  In fact, they just increased the facility limit from $300 Billion to $2 Trillion.   So what's the problem?  As always, everything works just fine until it doesn't.

Now, to illustrate, let's go back to the Lehman Brothers case study and their infamous "Repo 105/108's".  The quick description of these securities, in Steve Carell's words, is that they are overnight loans of "dog-shit wrapped in cat-shit" disguised as sales (with an associated profit) of 105% or 108% of the (probably) inflated book value of the DsWICs.  These Window Dressing transactions would be reversed in later accounting periods. The chart below describes what happened to Lehman's liquidity once nobody on Wall Street wanted to let them play in their sandbox.  An astonishing thing happens once counter-parties begin to suspect that they might not get their money/collateral back.  In Lehman's case, once the other kids decided that they didn't want to play anymore, Lehman lost its' ability to keep its' window-dressing going.  As you can see, the end was swift, but far from painless.  



Moreover, the FED's Examiner's Report described that more than $50 Billion of this type of window dressing was taking place on the LEH balance sheet, the equivalent of about 2x stockholder equity at he time.  After the fact, the Wall Street Journal reported that many banks had been quietly admitting that, like Lehman Brothers, they too had been using a Repo 105/108-like strategy to lower their leverage at quarter end. Citigroup, Bank of America and Bank of New York Mellon all used short term loans to temporarily reduce their holdings, while classifying the transaction as sales.

If you've ever been in a closed door management meeting where the discussion topic morphs into a round table investigation of what sort of financial engineering might be deployed to properly goose earnings and meet the quarterly numbers, you know exactly what I'm talking about.

Obviously, given the $475 Billion demand for Treasuries on 12/31/15 we can ask the question "so what the heck is going on?"  The obvious concern here it that the FED may believe that it has created a wonderful device to provide short term liquidity to the financial system, when in reality, it has provided a terrific tool for troubled mutual funds and banks to Window Dress their il-liquidity and hide all of their mistakes from their investors.


Goldman Sachs

Now....Given all of the above.....let's take a look at two very interesting, recently filed, Goldman Sachs documents.  In January, Goldman filed its' 2015 8-k Financial Summary reporting $71B Tangible Shareholder's Equity and $24B in Level Three Assets.  If we use my rule of thumb, that, in all probability, Level Three Assets should be written off, that puts Goldman's Tangible Shareholder's Equity at $47 Billion with a corresponding debt/equity ration of 18:1.  In other words, an accounting entry/write-down, impairment or devaluation of only 5.2% on its balance sheet assets would mathematically wipe out all of Goldman's Tangible Shareholder's Equity (Book Value).  Of course, history (2009, 2000, 1997, 1987, etc.) has shown that these banks somehow magically "link" their asset values with associated liabilities and are able to shed liabilities almost as quickly as the asset values decline, so the relationship isn't 1:1.  It's impossible to tell what the ratio is, but the destruction of book value doesn't track the reduction in asset values on a dollar for dollar basis.  That said, I don't think I have to mention (but I will) that volatility has been a bit spikey lately.  Japanese, Hong Kong, Chinese and other EM markets are routinely moving more than 5% on any given day, in any given direction right now, so whatever positions GS has in those assets, let's all hope, for the sake of the banking system that they are safe/hedged and at least relatively insulated from the fray.

The second document referenced above is the "Settlement in Principal with the RMBS Workgroup". This document describes the $5.1 Billion settlement for wrong-doing related to the 2009 Financial crisis.  The Banker Speak-Translator (BST) would simply describe this fine as a "cost of doing business".  So we might conclude, at least from past indiscretions, that Goldman doesn't exactly stake a claim to the summit of moral ground when it comes to making a quick buck.

That said, I've heard people say lots of things about Goldman Sachs over the years, but I've never heard anyone say anything like:

"Wow....those guys at Goldman are really a bunch of dopes....we really took those clowns to the cleaners on that deal."

Goldman Sachs, no matter what your opinion of their business practices, is always on the leading edge of everything and anything that happens in the financial markets. Whether it's "Portfolio Insurance", dot.com IPO's, Mortgage Backed Securities or the China Dream, Goldman Sachs, more often than not, is usually the first one to the party on most of these scams....um...uh....I mean "investment opportunities".


Today's Question

Is it more likely that Goldman somehow made a series of mistakes and got stuck with $24 Billion in Level Three Assets?;  or is it more likely that these assets are actually misguided window dressing for other mutual funds or money managers, and are sitting on Goldman's balance sheet for a few days until the coast is clear?  Moreover, could they be leading the charge on an unprecedented level of financial subterfuge that will only become apparent once the dust clears.  After all, there are plenty of potential Window Dressing customers out there.  Nobody wants to be the next Third Avenue, although it's becoming more likely by the day that these liquidity/redemption problems will be rearing their ugly little heads.

Finally, I'm not specifically picking on Goldman Sachs or accusing them of anything.  I'm working on a post which should provide more empirical evidence as to where this window dressing phenomenon is most likely be concentrated and how relatively widespread it might be.  Of course, this one is tough to prove. Obviously, nobody is talking about it....that would be counterproductive. Like Lehman's Repo 105's, the entire scheme depends on its secrecy.  Anyway.......Stay tuned.



Other light reading.....

2015 8K (Financial Summary) - $71B Tangible Shareholder's Equity and $24B in "Level Three" Assets
http://www.sec.gov/Archives/edgar/data/886982/000119312516433035/d84817dex991.htm

Settlement in Principal with the RMBS Workgroup
http://www.sec.gov/Archives/edgar/data/886982/000119312516430087/d119173dex991.htm

2014 8K (Financial Summary) - $69B Tangible Shareholder's Equity and $36B in "Level Three" Assets
http://www.sec.gov/Archives/edgar/data/886982/000119312515012516/d846191dex991.htm

FASB Repo Accounting
http://www.fasb.org/cs/ContentServer?pagename=FASB%2FFASBContent_C%2FNewsPage&cid=1176164127256

PWC ASC 860 - Executive Summary
http://www.pwc.com/us/en/cfodirect/assets/pdf/accounting-guides/pwc_transfer_2013.pdf

FASB ASC 860 - Grant Thornton Analysis
http://www.grantthornton.com/staticfiles/GTCom/Audit/Assurancepublications/New%20Development%20Summaries/NDS%202010/NDS%202010-32.pdf

More on Leh repo 105
http://blogs.wsj.com/deals/2010/05/27/the-repos-of-citigroup-and-bofa-honest-mistakes-or-window-dressing/

Epstein - Lehman Repo 105
http://www.ifrsaccountant.com/articles/repo-105-lehman-accounting.html

Yahoo! Finance post from Jared Bilkre
http://finance.yahoo.com/news/-475-billion-year-end-fed-auction-suggests-more-problems-in-credit--mutual-funds-023901085.html

NY FED - RRP Markets
https://www.newyorkfed.org/markets/rrp_faq.html

Counter parties - Primary dealers
https://www.newyorkfed.org/markets/pridealers_current.html


Expanded counter parties
https://www.newyorkfed.org/markets/expanded_counterparties.html

http://www.pragcap.com/window-dressing-with-feds-reverse-repo-program/

Zero hedge
http://www.pragcap.com/window-dressing-with-feds-reverse-repo-program/

Yahoo finance
http://finance.yahoo.com/news/-475-billion-year-end-fed-auction-suggests-more-problems-in-credit--mutual-funds-023901085.html

Tri party repo NYC
https://www.newyorkfed.org/banking/tpr_infr_reform.html

Ny fed presentation
http://www.bis.org/events/cpss_wspsmi/fahymartin_pres.pdf

NASDAQ/NYSE - Company/Symbol List
http://www.nasdaq.com/screening/company-list.aspx

http://people.stern.nyu.edu/jcarpen0/courses/b403333/08repo.pdf

http://www.bis.org/events/cpss_wspsmi/fahymartin_pres.pdf

https://www.blackrock.com/cash/literature/whitepaper/understanding-repurchase-agreements.pdf

Fed reserve rept 2013
https://www.newyorkfed.org/medialibrary/media/research/staff_reports/sr529.pdf

http://www.federalreserve.gov/monetarypolicy/files/pdcf_margins.xls

Third ave - footnotes on window dressing in the fine print
http://www.sec.gov/Archives/edgar/data/1031661/000134100415000918/form40-app.htm

Third Ave Language
(k)A portion is segregated for future fund commitment.
(l)Includes restricted cash pledged to counterparty as collateral management for forward foreign currency contracts.
(e)Security subject to restrictions on resale.  At July 31, 2015, these restricted securities had a total market value of $92,323,647 or 4.40% of net assets of the Fund.

http://www.reuters.com/article/us-usa-fed-reverserepos-idUSKBN0UE18Q20151231


FED Temporary Open Market Ops by day
https://apps.newyorkfed.org/markets/autorates/tomo-results-display?SHOWMORE=TRUE

Monday, February 1, 2016

Oh what a tangled web we weave.....

.....when first we practice to......oh what the heck....you know the rest.

I wasn't even going to post anything about Alibaba's Q3 12/31/15 fake numbers, but this is getting so over the top, so out of hand, that I just can't resist.  I took an hour of my life (which I'll never get back) to listen to the Investor call Thursday morning.  It was a mess.

Reference/Discussion Materials below:

Investor Call
Presentation
Press Release:
6K

Feel free to peruse the above for the details if you have the stomach for it.

On a semi-unrelated note....

One of the largest on-line Peer-to-Peer (P2P) lending businesses, Ezubao was shut down by Chinese authorities this week, describing it as the largest Ponzi scheme (by number of victims) in history. Nearly a million "investors" lost more than $7.6 Billion.

Here's one of the posts describing the debacle. Apparently, if you are a little old lady in China....they not only swindle you out of your money....but they rough you up when you make a trip to the company headquarters to ask a few questions about it. (See the video clip for the little old Chinese lady smack-down)
http://qz.com/606786/nearly-one-million-investors-were-fleeced-in-chinas-latest-ponzi-scheme/?utm_source=YPL

If you are wondering how this can happen, just read my post from a year ago entitled:  Alibaba....The  Ultimate Shadow Bank...."

The "Call"

Anyway, here's the opening salvo from the Q&A section of the Alibaba Investor Call.  As interpreted by the Dick Fuld BST (Banker-Speak-Translator ...patent pending)

The first question, from Carlos Kirjner at Bernstein was actually really good (Minute 19 of the call), and fielded by Daniel Zhang, CEO.

Carlos: "Could you give us the real figure for actual Gross Merchandise Value (GMV) that was actually shipped in the quarter?, net of returns, of course."

Carlos is pretty sharp.  He understands that GMV is hugely overstated, so he asked a reasonable question.  Here was the response.

Daniel: "When we look at the big picture, we have a lot of GMV.  We are very happy.  The weather was very warm so we didn't sell very many winter coats.  But it's colder now so we are selling more coats."

(pause)

Carlos: (unspoken): "Um...well OK...thank you Daniel...I think.  I really wish you understood English."

Unfortunately, though I didn't think it possible at the time, the rest of the call went down hill from there.

Bullet Points of Silliness:

So here are the main bullet points that have been building over the last year.  Most of the details/concepts have been described in each of the quarterly posts contained within the bowels of this blog:

One of these things is not like the others....
Alibaba...the Odyssey continues...
Alibaba...a year in review....
Once upon a time....

But again, the Alibaba management team continues to exceed even my most outrageous expectations:
  • GMV and related Revenue are unverifiable, inconsistent and out of step with the real economy of China.  Every other Chinese ADR listed on US exchanges is reporting reduced revenues in the last half of 2015, yet Alibaba is reporting huge organic growth, 23% YOY GMV; and a whopping 32% YOY Revenue growth.  There's no other way to say this.  This is ridiculous.
  • Share based Compensation continued at an absurd level $675 million in the quarter; 14% of revenue.
  • "Questionable Assets" continued their meteoric increase; a currency adjusted US$3.2 Billion  in the quarter and US$23 Billion since 6/30/14 prior to the IPO,  On top of that, management blatantly flaunts a line item that I've never seen, in all my years in finance: "Gain on deemed disposals/disposals/ revaluation of investments"  This write-up is an astounding US$7.2 Billion for the nine months ended 12/31/15 and US$ 458 million in the quarter. Again, in a period where the Chinese stock market and asset values have fallen off a cliff.
Published orders/shipments/Revenue/Employee and GMV ratios, again, don't make any sense.  The law of large numbers tells us that millions of occurrences normally yield very little variation on the margin.  In other words, it takes earth-shattering events to move a needle one way or another.  Here are just a few examples:
  • On "Singles Day" there were 95 million Mobile Buyers out of the 115 Million Total Buyers on that day. So all of a sudden, on that particular day, nobody in China used their desktops to buy items on Alibaba?  The Mobile Users jumped from 68% in the quarter to 82% on that particular day?  Really?
  • As of 12/31/15 Alibaba had 36,465 employees, compared to 36,662 as of September 30, 2015 and 34,081 as of December 31, 2014.  So they are doing 30% more business with essentially the same headcount as the prior year?  Moreover, costs (Cost of Revenue, Product Development, Sales & Marketing, G&A) have increases 39% YOY with roughly the same headcount?  Really?
  • Along the same lines, Cost per Employee (based on the above cost categories) has increased from US$162,000 per employee for the nine(9) months ended 12/31/14 to more than US$213,000 per employee for the same period ended 12/31/15.  The Share Based Compensation component of the Cost-Per-Employee for the comparable 9 month period(s) was $38,000 increasing to $49,000 in 2015.     I did this calculation several times to make sure I wasn't making a math mistake.  Where are all these cost increases coming from?  Shouldn't costs per employee decrease as fixed costs are absorbed on increased volume?  Finally, where do I get an employment application?  Jack, do you give Re-Lo packages?
  • Maggie Wu mentioned there were 20,000 developers working on Cloud Computing in the Alibaba ecosystem. (min 31:30 of the call)  Who are these developers?  There are only 36,000 Alibaba employees.  Are these developers contractors?  Are they capitalizing the cost of this "development" when it should be expensed as wages?  Cloud computing only represents 2% of Alibaba's Reveune.  Ms. Wu's comment would merit significant discussion in any venue, apparently except the Alibaba Investor Call..
  • Again, there is no discussion or even mention of the numerous acquisitions reported by financial press during the quarter.  Most notably, Bloomberg reoprted that Alibaba had acquired Youku Tudou in November in a $4.8 Billion deal (Deal to close in the 1st quarter of 2016)., yet there was no mention of any details of this transaction or terms in the 6k or investor call.  Are you kidding me?  Really?
  • Moreover, there is no discussion (other than vague "synergy" BS re: Koubei and "cloud computing") about the consolidation of Alibaba's numerous subsidiaries.  As described in prior posts, none of these recent acquisitions', performance and/or accounting methods used to report revenues and costs are described.  
  • The press release states that "On November 11, 2015, we attracted over 115 million buyers to our marketplaces and enabled RMB91.2 billion (US$14 billion) in GMV settled through Alipay on our platforms. Our success on Singles Day was a testament to the scalability of our ecosystem. Our platforms processed 467 million delivery orders during a 24-hour period.  467 million singles day  orders for $14 Billion= $30/per order.  At US$149 Billion GMV; there were roughly 5 Billion orders shipped during the quarter?  UPS Shipped 1.5 Billion Packages globally during the same quarter.  Really?
  • Again, there is no discussion re: the Alipay profit sharing agreement and related "escrow fees" paid to Alipay.  Theoretically, the fees on the Alpay escrow service for settling US$149 Billion in GMV during quarter should be enormous, (i.e. est. US$1.5 Billion or 28% of Revenue at 1% of GMV) yet there is no mention of the fees or offsetting "profit sharing" agreement  in the 6K, Presentation or Press Release.  I've described the details of what should appear in the financial statements in the "I was talking to an analyst..." post on this blog.  
  • Joe Tsai, defending Alibaba's odd, enormous growth metrics in the face of a well documented economic slowdown, cited that "Retail Spending in China increased 10.7 % YOY in 2015".  Since Alibaba is leading the charge in e-commerce, according to Joe, a 23% YOY increase in GMV and a 32% increase in Revenue was reasonable and expected.  Is it really reasonable to believe that Alibaba's GMV is growing at more than twice the national retail sales growth rate?  Even if the 10.7% growth rate were accurate?  In Joe's words, Alibaba "is" eCommerce in China.  In a related note, Wang Baoan, head of the National Bureau of Statistics was arrested last week on corruption charges.  I'm just sayin'....

An Interesting Schedule:

So, based on Joe's dubious claims, I pulled the monthly data from the English Version of the NBS website and put the last quarter's data in a format I could better understand.  All conversions are at 6.48 RMB = US$1.

My assumptions are as follows:

1.) According to the NBS, Retail Sales in China for the 12 month's ending 12/31/2015 for "Enterprises Above a Designated Size" accounted for US$2.066 Trillion in Retail Sales last year (about 60% of all retail sales).  The thinking is that data provided by these larger enterprises is more accurate and takes out the variation that might be attributable to small, mom & pop retailers.  Since Alibaba is a "Large Business" by any standard, this seemed to be the appropriate data set for comparison.
2.) Alibaba, according to every conference call and filing so far, does not sell any meaningful amounts of Grain, Oil, Foodstuff, Beverage, Tobacco, Commodities, Liquor, Medical Care, Fuel, Cars & Building Materials.  (Although I've disputed this since the websites are littered with Industrial Goods, Automobiles, Real-Estate, Bad Debts/Assets, Foreclosures & Knock-Offs, reasoning that including sales of these categories is the only way they could possibly get to the allegedly fake GMV levels they are reporting). Therefore, I've adjusted the NBS Data to reflect only the Categories that Alibaba claims to sell on their websites.


URL - NBS Retail Sales - Large Businesses  - US$2.066 Trillion in 2015

So based on the above, here are my observations for the QE 12/31/15:

1.) According to Alibaba's filings; their ecosystem is "involved in" the equivalent of 79% of the Category Sales.  The equivalent of eight (8) of every ten (10) "large business" retail transactions that take place in China is handled by the Alibaba ecosystem.....Really?
2.) "Singles Day" apparently has no real impact on Retail Sales in China. In fact, Retail Sales in December were actually greater by US$27 Billion than in November.  Yet, "Singles Day" is a GMV bonanza for Alibaba.  Who knew?
3.) The Published NBS data doesn't actually "add up".  Perhaps that's why they arrested Wang Baoan?  He couldn't do rudimentary math?  Perhaps the books weren't cooked well enough?
4.) Petroleum & Gasoline usage was down sharply in the quarter.  Since pricing is government controlled and relatively constant, the bulk of the Retail Fuel Sales decline is most likely due to reduced volume/gallons not price. With all of this eCommerce delivery going on, shouldn't gasoline/fuel usage be on the rise?
5.) China's Retail sales (as reported by the NBS) are increasing at roughly 9% YOY for QE 12/31/15 (Not 10.7%).  If Alibaba's GMV increased by more than 23% in the quarter it would stand to reason that Alibaba's competitors suffered significant sales declines. Although it's possible that their books are cooked as well.  Apparently, 2+2 = 437 in Chinese financial circles.
6.)If Alibaba's GMV continues increasing at 23% YOY and China's Category growth remains constant, by next year Alibaba's Reported GMV will be greater than all of China's "Retail Sales from  Businesses above a Designated Size".  The sum of one part will be greater than the whole.  That will be one heck of a trick

So what are we left with?

We have increasingly more outlandish claims made by Alibaba management.  We have odd metrics, inconsistent with economic reality at every turn. It's as though Jack just scribbles some numbers on a piece of paper and gives them to Maggie and Daniel to read to the analysts like some sort of twisted bed time story. We have fraud and graft running rampant in the private sector, which anyone with a pulse should have seen coming months/years ago.  We have high ranking government officials routinely "perp walked" through the pages of China's press.  The entire Chinese economy appears to be unraveling into one, giant, white-collar crime.

Personally, I'd feel much better about all of this if it were just incompetence.


Additional Links & reference Material

Investor Call
http://edge.media-server.com/m/p/nm84bore/r/1
Presentation
http://www.alibabagroup.com/en/ir/presentations/pre160128.pdf
Press Release:
http://www.alibabagroup.com/en/news/press_pdf/p160128.pdf
6K
http://www.sec.gov/Archives/edgar/data/1577552/000110465916092294/a16-3084_1ex99d1.htm

China Retail Sales - $3,573 Trillion