Deep Throat: 2016

Thursday, December 22, 2016

Why Health Care Costs So Much in America.....

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Monday, December 5, 2016

Holiday Wishes.....from a born again Investment Banker

This, of course, is the time of year when we Investors, Investment Bankers and the Titans of Finance count our numerous blessings and think about all of the good things, God's work, if you will, that we've accomplished over the last year. We rear back in our Italian leather Pininfarina Shiatsu massage desk chairs, gaze out at the skyscrapers interrupting our horizon, with a good cigar and a nice Islay Scotch. We are humbled by our good fortune and warmly give (implied) thanks to all of the "little people" who've sacrificed so beautifully to make our success possible.

The Near-ZIRP fueled markets are making new all-time highs on a nearly daily basis now. We marvel at our own year-end genius, being able to contrive yet another, dare I say brilliant, series of accounting schemes which cloak our barely viable businesses, making them appear as though, to the untrained eye, that they are actually not on life support, but perhaps, nearly profitable. Our epic bonuses, because of this creativity, have been determined, calculated and all but guaranteed. We're perusing the listings for island vacation homes and the deposits on our yacht upgrades/refits have been wired to ensure an early spring delivery. This was another huge, tremendous year. We are truly humbled and grateful.

But alas, like all truly Type-A Money Men, we are 24x7 animals. We are wound tighter than a pallet of two-dollar watches purchased at a discount on T-Mall. What keeps us up at night? What gives us those ulcers that the "little people" never seem to get? Our greatest fear, while visions of stock options dance in our heads, is that somehow, someday, when we least expect it.....

......our Collateral for this gigantic mess will somehow morph into a humongous pile of tinsel-covered doggie turds nestled under our collective Christmas trees.......

To that end, I present to you:

The Holiday Tree of "Tinsel Covered Doggie Turds!"

So what do the doggie-turd-ornaments on the above tree represent? The seven businesses above (With ample assistance from Western Investment Banks) are the poster children for debt fueled, acquisition-driven accounting schemes creating billions of dollars of "Questionable Assets" (as defined in prior posts). Of course, I've covered Alibaba, Tencent, Softbank, Yahoo! and Fosun in previous blog posts, but the numbers are getting sillier by the quarter. In the spirit of the holidays, these goofy numbers should absolutely be revisited. Make no mistake about it, this mess is a carefully choreographed, incestuous global scheme made possible by the "Theory of Financial Relativity" and the participation of US/EU/Swiss Investment Banks. The tentacles and complex interrelationships stretch much deeper than could possibly be discussed in this post, but lets take a shot at it anyway.

To start, feel free to peruse my original posts (click on the company name below), but here are the "one sentence" descriptions, gleaned from my analysis, that I'll use to describe these businesses.

Alibaba - Turning tinsel-covered-doggie-turds to gold.
Yahoo! - Expert at managing "dirty little secrets".
Softbank - The world's premier "Happiness" vendor.
Tencent - Skyrocketing revenue from "free services"...huh?
Fosun - You can't read the annual reports without laughing.....financial comedy gold
JD.com - "I can get it for you wholesale!"
Evergrande - "Why finish a project when you can just start a new one!"
Investment Banks - "Sure, we can make that happen, but the fees will be much more than the customary thirty pieces of silver..."

Now, let's take a topside view of the "Magnificent Seven" today vs. 2012.

All of the above are summarized from the relevant financial reports (links below). When we examine the above 12/31/2012 Balance Sheet Figures when compared to the most current 2016 figures a few thing absolutely jump out at us:

The Market Cap of these businesses has increased nearly five fold in roughly three and a half years from US$130 Billion to US$615 Billion.
"Questionable Assets" (Intangibles, Goodwill, Investments in "Investees", Financial Assets "held for sale", Construction Projects and Construction In Progress (Which are inherently difficult to value/reserve) have increased nearly ten fold, from US$39 billion to a whopping US$374 Billion. "Questionable Assets" of these seven businesses now represent 57% of their collective Balance Sheets.
Bonds, Notes and Bank Debt have increased seven fold from US$39 Billion to US$270 Billion.
Liabilities as a percent of "Net Assets" (Total Assets: Less: Questionable Assets) have doubled from 88% to 170% in just over three years. In other words, there are now $1.70 in bills to be paid for every $1.00 of "Net Asset" Book Value.

Here are a few hypothetical questions:

If you build 10,000 apartments and sell one for a million dollars (In a slightly less than arms length transaction) are the rest of the unsold apartments also worth a million dollars each?
If you borrow from US Investors and pay $10 million for 5% of an unprofitable, money-sucking company (purchased from a good friend), is the company now worth $200 million? When you buy another 5% for $20 million is the same company now worth $400 Million?
To paraphrase Martha Stewart, increasing assets is normally a "good thing", but ask anyone who bought a house in Florida or Las Vegas in 2007, borrowing money to buy that house set them back a pretty penny once the value of that house was reset. So what might happen when the value of the underlying assets of the Magnificent Seven is reset? What happens to the $472 Billion of liabilities ($270 Billion of which is Bank Debt and Bonds)?
As discussed in prior posts, what if the RMB is actually worth a nickel rather than 15 cents? Will the Magnificent Seven Balance Sheets, Revenues and (fake) Earnings be worth a third of what they are worth today for Western Investors? What if, like the current economic events and related hyperinflation unfolding in Venezuela, the PBOC has to re-double China's money supply ...again? Like China, Venezuela is resource rich (more oil reserves than Saudi Arabia) but their economy has been woefully mismanaged (more poverty than Brazil). Like Venezuela, China's Central Bank has been running the printing presses on overtime. The PBOC has doubled M2 in the last five years and is currently increasing broad money at 10-15% a year. What if, like in Venezuela, China's accumulated cost of mismanagement and kicking the can down the road accelerates?

Three and a half years ago the Magnificent Seven were all comparatively small, harmless little accounting schemes, floundering around in China (....and Japan with tentacles reaching to China in the case of Softbank). Is it more probable that these businesses are incredibly profitable cash machines, generating 40% YOY growth and enormous investor returns?....or, perhaps, more likely, that they just might be money-sucking Ponzi schemes (Implemented under the watch of the CCP and the PBOC) to support China's teetering dual currency system and keep tabs on their increasingly querulous population? Xi's "Social Credit System", an initiative to track Chinese Citizen's every move requires significant resource and capital. The stated goal in this Orwellian aggregation of big-data is to “Allow the trustworthy to roam everywhere under heaven while making it hard for the discredited to take a single step”. The odd twist is that a significant portion of this "social credit" system is being funded by Western Investors/Capital. As I've discussed, this wouldn't be the first time the CCP has tried to "Fake it" to control their message in an attempt to make folks believe their presentation of the facts appears to be a bit different from reality. (The old joke is that the only accurate piece of information in a Chinese Newspaper is the date….) I'll ask the obvious......Why would the Chinese government allow foreign investors to benefit handsomely from these IT "crown jewels"? Further, why would these phenomenal cash machines be aggressively seeking capital everywhere on the planet except mainland China?

As luck would have it, in their insatiable thirst for fees, Western Investment Banks saw the need/opportunity and got involved. They set up some Caribbean Shells, hired a few mail-order accountants and found some hired-gun economic “experts” supporting their thesis, in an awkward, yet successful attempt to put the details of these schemes out of the reach of US regulators while simultaneously gaining access to Western Capital. The Bankers began to slop gobs of lipstick on these little Christmas-turds and convinced greedy, naive, rudderless investors that Chinese eCommerce is/was the next big, silly thing ....and now look what we have! There is nearly US$1.1 Trillion of "Maximum Economic Impact" (MEI) concentrated in these seven bogus businesses (see above schedule). (I define MEI as the Market Cap of the stock which could/might/will go to zero.....PLUS the value of the balance sheet liabilities. i.e.) Creditors expect to be paid back......Hint: Most of them won't be.) Note that technicians would argue that the MEI should be reduced by the liquidation value of any assets plus cash on hand, but in practice, when these businesses "go dark" offshore creditors and shareholders have little/no ability to recover.

Obviously, this folly would have had a limited impact on global markets had the Investment Banks not gotten involved. Without all of this US/EU/Swiss capital deployed, the exposure/risk would have been much smaller. The now unavoidable carnage would have been substantially contained on mainland China and US Markets would have been relatively unaffected by the impending defaults. Chinese banks and regulators, as they did with the equity markets in August 2015, would step in and continue to refinance the losses, minimize the write-offs, extend credit, increase the money supply and kick the can down the road....just like they've been doing with virtually every asset class over the last few years. Unfortunately, containment is no longer possible and the contagion continues to grow.

Because, in big round numbers, roughly $3 Trillion of these securities are widely held (Again: The Magnificent Seven is just the tip of the China Syndrome iceberg) when the values reset, investors will be heading for the exits in unprecedented droves. (Remember 2009?) The trust in our financial institutions will again be destroyed. As investors, we'll lick our wounds and start all over again.....the beat goes on. TARP....to infinity and beyond.....

A Fond Holiday Farewell

This is also the time of year when regimes and administrations reevaluate their personnel. Budgets and Org. Charts get "adjusted". Organizations, despite incredible fake profits, take it upon themselves to "do more with less". We are often forced to say farewell to old friends, wishing them well in the next phase(s) of their lives. (For parachute equipped upper management it's usually "spending more time with family and friends"....for underlings, it's more often "frantically searching for employment from their parent's basement".) Of course you've heard by now that Mary Jo White, the SEC Chair, has resigned and will be vacating her post by the inauguration, forgoing the final two years of her appointment. We, of course, wish our little elf all the best as she moves on to whatever she might be moving on to.

Sadly, the passage of time will eventually show that Mary Jo was actually the second worst regulator in the history of the SEC. If you believe that the job of the SEC is to randomly send nasty-grams to CFO's criticizing their disclosures (or lack thereof) while documenting their responses, then Mary Jo's SEC has done a pretty good job. On the other hand, if you believe (as I do) that the SEC should actually review filings and IPO's and gosh-oh-golly-gee, perhaps prevent systemic fraud and questionable securities from hitting the markets in the first place, then I'm afraid the SEC under Mary Jo's watch has come up woefully short.

If our local police department operated like Mary Jo's SEC, the dialogue between officers and an (alleged) masked, armed perpetrator in a bank lobby would go something like this:

Police: "Sir, with all due respect, could you explain to us why you are wearing a ski mask and pointing a gun at the teller?"

Perp: "Absolutely....first, I'd like to thank you for stopping by and taking the time to review my business....ummmm...I mean my vacation plans. I'd also like to personally thank you for your public service. That said, I'm wearing a ski mask because I'm going on a ski trip....yeah...that's it.....a ski trip. Of course, I need to withdraw some money for my vacation. Since this is an 'open carry' state, the teller noticed my firearm and asked me if she could see it...she mentioned that she is a real gun fancier.....sort of an Annie Oakley as it were. I can see that you clearly don't understand the situation and what's actually going on here. I'm sure it looks quite confusing, but I'm also grateful that you've given me the opportunity to clear things up."

Bank Teller: (Nervous, frightened, hands in the air, nodding 'yes' in agreement.)

Police: "Well.....I guess that makes sense....you should really be more careful though. You can see how something like this might cause some raised eyebrows for someone unfamiliar with your business/vacation model....can't you?"

Perp: "Now that you mention it, I can see your point of view. I'll take your feedback under consideration on all of my future transactions. Thank you so much for your assistance. Of course, if you ever tire of police work, please feel free to look me up and I can probably find you a cushy job in my organization!"

Police: (Leaving the scene walking back to their squad car) "Wowww....can you believe that guy? What a dope...wearing a ski mask and bringing a gun into a bank? What was he thinking?.... ..LOL....LOL"

Perp: (Robs the bank.....of course.)

Police: (Upon reviewing what happened, the Police Commissioner sends a sternly worded letter to the alleged perpetrator at his Cayman's beach house, criticizing him for his lack of cooperation. The Commissioner requests additional information 'pronto' or he/she will be really, really upset.)

Of course, if the police would have simply arrested the "perp" in the bank (or at least asked him to leave before the crime took place) the problem would have been solved....and nobody would have lost any money.

I also mentioned that Mary Jo will be vilified as the "second worst" SEC Chair in history. With little doubt, based on the events about to unfold, the worst Chair in history will most certainly be the next one. My guess is that Mary Jo has resigned because she sees the handwriting on the wall (she's actually a pretty smart lady) and is hoping to distance herself as soon as possible from the impending, inevitable disaster (which she failed to see coming until now....Ooopppss!). From her point of view, the longer this mess holds together, the less likely it will be that she (rather than her successor) will be required to give those long, tedious hours of "What did you know and when did you know it...." Congressional testimony as is required by our political process once the tinsel-covered-doggie-turds hit the fan.

Based on the current political environment, Mary Jo's replacement will probably be a laissez-faire, less-government, figurehead who will spend his/her tenure making a few speeches, hobnobbing with corporate royalty and playing golf. Nice gig if you can get it. He/she will undoubtedly accept the appointment with the same oblivious, lack of understanding of his/her fate that an Iraqi goat might have while grazing aimlessly in a war zone mine-field.

Goat: (thinking) "Hey....the grass over there looks really tasty"....clip-clop-clip-clop.... BOOM!!"

So How Can We Make Money From This Mess?

I've been thinking about this for years. The obvious answer is "short the doggie-turds" and collect your pay-check. Unfortunately, as I've mentioned before, because of the "Law of Financial Relativity" it's just not that simple. This valuation anomaly can go on for quite some time. It serves no one's interest to have the whole thing collapse overnight. In fact, the problem is so consuming that Central & Investment Bankers can't afford to just let these "asset" valuations collapse without a fight. Misery loves company and tragedy makes strange bedfellows. Like most things in life, I'm sure the signals leading up to the reset will be obvious after the fact, but the real trick is to recognize them beforehand and take appropriate action. Of course, as always, I'll let you know what these signals might be as soon as I figure that out.

In Conclusion......

Finally, as you might recall, I own, in my humble, slightly biased opinion, the best insurance agency in Cleveland, OH. Since our little insurance business has been so big-ly, hugely, tremendously-tremendous this year and this is indeed a Christmas Greeting......I wanted to let all of you know that we've taken on additional part time staff to ramp up for the holidays!........for our little business, customer service is now, has been and will always be Job #1!

Wednesday, November 2, 2016

Just when I think.....

"Just when I think you couldn't possibly be any dumber, you go and do something like this...

....and TOTALLY REDEEM YOURSELF!"

Harry Dunne - World Renowned Economist - circa 1994

Well, I spent an hour of my life (that I'll never get back) listening to the Alibaba Investor Call this morning. I also went through the Press Release, Presentation and filing (links below) and I must say, Joe, Maggie and Daniel never cease to amaze. Just when I think the numbers couldn't possibly get any dumber.....well....you know the rest....

Here are the links:

Press Release:
http://www.alibabagroup.com/en/news/press_pdf/p161102.pdf
Investor Call/Webcast:
http://edge.media-server.com/m/p/was7pq6k
Presentation:
http://www.alibabagroup.com/en/ir/presentations/pre161102.pdf
SEC Filing:
https://www.sec.gov/Archives/edgar/data/1577552/000110465916154041/a16-20954_1ex99d1.htm

Link to Prior Quarter(s) Analysis:

"Really?.....how silly can these numbers get?"

You are probably wondering how I can possibly analyze all of these figures and send out my analysis during the Investor Call. (Note the time stamp on the email blast.....the Investor call wrapped up by 8:30 AM US EST) You might be thinking that I have some sort of crystal ball or I'm privy to insider information.....Quite the opposite actually. I don't have a mole. I just know exactly what Alibaba Management is going to say, therefore I know exactly what I'm going to write. As the Rodeo Cowboy once quipped, "I've ridden this bull before".

I wrote most of this post over the last few days, I just had to wait for the press release to fill in the details. i.e.) Did fake revenue and GMV increase 29% or 32% during the quarter? Was share based compensation 10% or 12% of fake revenue? What level of genius did management rise to? Did they pull off another "Gain on the Deemed Disposition of Fake Assets"? Would it be US$ 2 Billion? .....maybe even US$ 3 Billion? Everything they touch turns to gold! The suspense, as always, is mind-numbing. So you can see, in a veiled effort to maintain my journalistic objectivity it's only prudent, polite and a professional courtesy for me to withhold my analysis at least until Alibaba Management finishes presenting their fake numbers before I analyze them.....it's really the very least I can do.

Here are the Bullet Points for today's buffoonery:

1.) Astounding Revenue Growth (55% year over year for the quarter ended). No other (real) large business or economy on the planet is experiencing this type of growth. Businesses all over the world are generally treading water right now, looking for direction and sanctuary. Global growth, even though supported by extraordinary levels of Central Bank stimulus can best be described as stagnant, yet Alibaba's reported growth story is somehow immune to macro-economic factors.

2.) Oddly, Alibaba's signature fake metric, GMV growth, was not presented or discussed, at least that I could see, in any of the disclosures (Other than Daniel's cryptic response to the second last question of the Investor Call that GMV "Looks good and is on track") If we have some fun with ratios, we can extrapolate that Alibaba's GMV this year, with a "conservative" 24% annual growth rate will be just short of US$ 600 Billion (Using last quarter's slowing 24% GMV growth rate applied to the 3/31/16 YE numbers). This extrapolated number now becomes 125% of Walmart's annual sales. Note that according to China's National Bureau of Statistics (NBS) data, Alibaba projected Quarterly GMV of roughly $150 Billion is now greater than ALL ECOMMERCE SALES OF PHYSICAL GOODS IN CHINA (US$146 Billion during the same quarter). As an aside, GMV reported by all US listed ADR's is now about twice the NBS total eCommerce figure. (If these ADR's and the Chinese government are going to publish ridiculous figures like this you'd think they'd at least get together and compare notes.) If Alibaba's projected GMV were GDP, Alibaba would now be the 34th largest Economy on the planet, right behind the United Arab Emirates. They've somehow accomplished this economic miracle with a few thousand employees, a few computers and an "ecosystem" of undisclosed, odd partnerships that somehow get these goods from point A to point B. Joe Tsai describes "two million" off-the-books "associates" involved in the Alibaba eCommerce effort, without describing (or apparently knowing) how this "ecosystem" works or how these people get paid. Truly amazing.

3.) Share-Based Compensation (Stock Grants & Options) increased from US$556 Million to US$637 million for the quarter, and continues through the roof at 12% of FQR (i.e. Fake Quarterly Revenue ). Since FQR increased 55% this naturally drives the SBC ratio lower. Math is a wonderful thing.

4.) The creation of "Questionable Assets" also accelerated dramatically during the quarter. Questionable Assets (as defined in prior posts) increased by US$ 3.5 Billion during the quarter and now comprise 72% of the Balance Sheet.

As an aside, did they really convert another US$ 3.5 Billion in cash to financial vapor in just three months? Again, there is no discussion re: the details/components of this gigantic write up/purchase in the Investor Call, Press Release, Presentation or filing. They've increased these same "Questionable Assets" a whopping $33 Billion in just over two years (since the IPO), fueled primarily by increased bank debt, bond issues and the IPO money. How is this even possible? At some point, these investments (aka boondoggles) will have to be written down/off. This is indeed another milestone quarter for Alibaba. "Questionable Assets" exceed Shareholder Equity by US$ 1.2 Billion now. If I'm indeed directionally correct about the "real" value of all of this intangible fluff, unless the Chinese banks step in with a bail-out, Alibaba is un-officially just a good flush or two away from swirling down the financial commode as I type.

5.) For the second time in history (Q1 and this Quarter) the Group has reported selected Segment data. (pg 21 of the Press release). All of the acquisitions generally since the IPO, described as Cloud Computing, Digital Media & Entertainment and Innovation Initiatives (plus unallocated expenses) contributed operating losses of US$ 977 million. BABA's share of losses for its' "Equity Investees" (Koubei, Youku Tudou, Cainiao, et al.) came in at US$ 85 Million. (pg 13 of the Press Release) From a purely cash flow perspective, these businesses are providing about as much utility as a leaf covered dog turd on a crisp fall day.

6.) Costs are skyrocketing. Quarterly Expenses excluding Share Based Compensation (SBC) increased by US$1.25 Billion on an absolute basis, or an additional 4% of Revenue YOY.

7.) Borrowing has also, of course, increased significantly in the quarter. Liabilities are up by US$ 2.4 Billion, of which US$ 1.2 Billion is Bank borrowing.

8.) Again, there is no detail provided for the required Alipay/Ant Financial profit sharing accrual and "processing fee" offset. (Remember, Alibaba "nationalized" (stole) this business away from Yahoo! and Softbank in 2011) Presumably, since there is no discussion of the net profit-sharing amount, it stands to reason that there must continue to be no significant profits in Alipay/Ant. Perhaps they have adopted the Lending Club (NYSE:LC) model. (i.e.) Make under-priced loans to un-bankable businesses and hope for the best. It might look good for a while, but as we learn repeatedly, it's hardly sustainable.

9.) Finally, in my mind the most important figure, the FNI (Fake Net Income) decreased Q over Q from US$ 3.4 Billion in 2015 to US$ 1.1 Billion in the quarter just ended (pg. 26 of the Press Release). It's actually relatively flat after the elimination of the absurd prior year US$ 3 Billion "Gain on deemed disposals/disposals/ revaluation of investments and others"(Authors note: That description still cracks me up whenever I read it. You just can't make this stuff up.) This Net Income number (albeit fake) is shockingly small for a business which purportedly has cornered the e-Commerce market in China, shares profits with the preferred payment method of every Chinese Consumer (900 million registered Alipay users) and holds estimates of up to US$ 200 Billion of the Hard-Working-Chinese People's money in related, off the books investment funds. Moreover, Alibaba's demonstrated, unquenchable thirst for cash is far from typical of a business that, by Alibaba's own account has a virtual monopoly on eCommerce, and all that is on-line in the "World's Second Biggest Economy". Jim Chanos likes to point out that in the last year Alibaba has consumed more capital than Amazon.com has required in the last twenty years. Why do they need all of this capital? Chanos's theory is that they are funding operating/capital losses at all of these "off the books", related, ecosystem businesses. With Alibaba's reported market dominance, one would think that Alibaba treasury personnel should be driving to the bank daily with dump trucks full of cash to deposit, rather than scouring the globe for more sucker capital lurking under any remote off-shore rock they are fortunate enough to overturn.

10.) Acquisitions and funding rounds continue unabated. (Not Discussed) The $1 billion raise for Koubei and $1.4 billion raise for ZTO, are both Potemkins for Alibaba. These are just two more businesses capable of generating huge write-ups and "gains on deemed disposal". Contrary to management's demonstrated philosophy, raising capital is not an acceptable surrogate for real profit, earnings and economic value, yet this has been Alibaba's game plan from day one.

11.) There is, of course, only a passing mention of the ongoing SEC Investigation, even though there is a possibility that there is a whistle-blower involved has been reported. Oddly, this makes perfect sense. Alibaba certainly wouldn't disclose investigation details in a public forum. "Hey, our whole business is an accounting scheme, but we're delivering real investor value anyway!". Mary Jo White won't say anything since it would be tantamount to admitting the SEC is, well, to be kind, incompetent at best. "Oooppsss......we totally missed the biggest accounting fraud in history....our bad.....Sorry!"

If you are a regular reader of this blog and you think that this post looks oddly familiar, you are spot on. Just like Alibaba's fake numbers, I copied the language almost verbatim from my Review of the 1st Quarter 2016 (June 30th QE) numbers posted August 11th, 2016. Why reinvent the wheel when nothing has changed?

The silly scheme continues....and the made-up details of the mis-rep get more entertaining by the quarter. I'm really looking forward to the "Singles Day" figure.....another 40% increase would put them over US$ 20 Billion for the day.....about the same revenue as Alcoa Aluminum for the year. Of course, It would take real guts to publish a fake number anywhere near that.....but I'd bet they'll come close.

Additional Reading:

NBS Data - Sept 2016
http://www.stats.gov.cn/english/PressRelease/201610/t20161020_1412060.html

NBS Data - June 2016
http://www.stats.gov.cn/english/PressRelease/201607/t20160715_1378027.html

Jim Chanos - CNBC
http://www.cnbc.com/2016/10/25/short-seller-chanos-lays-out-his-bear-case-for-alibaba.html?__source=yahoo%7Cfinance%7Cheadline%7Cheadline%7Cstory&par=yahoo&doc=104047437

ZTO Express - F-1 - Filed Oct 14th, 2016
https://www.sec.gov/Archives/edgar/data/1677250/000104746916016123/a2229922zf-1a.htm#bm40201_summary_consolidated_financial_data

Alibaba SEC Investication - New York Post Article
http://nypost.com/2016/11/01/high-up-alibaba-staffer-helping-sec-probe-into-tech-giant/