Friday, June 24, 2016

In Non-Brexit News: "More than 30 people burned after Tony Robbins urges them to walk on hot coals to ‘unleash power within’"

From the National Post:
DALLAS — More than 30 people who attended an event with motivational speaker Tony Robbins have been treated for burns after Robbins encouraged them to walk on hot coals as a way of conquering their fears, Dallas fire officials said.

Five people were taken to a hospital Thursday night, while the rest were treated at the scene for burns to their feet and lower extremities, Dallas Fire-Rescue spokesman Jason Evans said.

The hot coals were spread outside the Kay Bailey Hutchison Convention Center as part of a four-day Robbins seminar called “Unleash the Power Within.”
 Some people were not concentrating on walking across the coals because they were taking selfies.
Representatives for Robbins didn’t immediately return messages Friday, but in a statement provided to KTVT-TV organizers said about 7,000 people walked across the coals and only five “requested any examination beyond what was readily available on site.”

“Someone not familiar with the fire walk observed the event and called 911 erroneously reporting hundreds of people requiring medical attention for severe burns,” according to the statement....MORE
Via: Mugatu

See also:
Florida Man Performs Fire-Breathing Routine at High School Pep Rally, Eight Hospitalized 

"Now London Wants to Exit Britain"

From The Week:
Ready for a Lexit? A day after Britain voted in favor of exiting the European Union, Londoners flocked to social media Friday to urge the capital to exit the country and become an independent state.

There's even a petition up on Change.org that already has thousands of signatures, calling for London's mayor, Sadiq Khan, to declare the city's independence. "Let's face it — the rest of the country disagrees," the petition reads. "So rather than passively aggressively vote against each other at every election, let's make the divorce official and move in with our friends on the continent."...MORE
Except for the five boroughs, Barking and Dagenham, Bexley, Havering, Hillingdon and Sutton who voted leave and who will probably secede from London:

 Graphic of London results

And then the neighborhoods within those boroughs....Are we not men? We are devolution.

Evans-Pritchard: "The sky has not fallen after Brexit but we face years of hard labour"

There is no guarantee that the referendum leads to an exit so a lot of the commentary is speculative.

That said, there is a greater-than-trivial chance that "the whole world, including the United States, including all that we have known and cared for, will sink into the abyss of a new dark age made more sinister, and perhaps more protracted, by the lights of perverted science."

Oh wait...*

From The Telegraph:
Brexit
The City is already changing its tune, insisting 
that it can prosper outside the EU after all 
It is time for Project Grit. We warned over the final weeks of the campaign that a vote to leave the EU would be traumatic, and that is what the country now faces as markets shudder and Westminster is thrown into turmoil.

The stunning upset last night marks a point of rupture for the post-war European order. It will be a Herculean task to extract Britain from the EU after 43 years enmeshed in a far-reaching legal and constitutional structure. Scotland and Northern Ireland will now be ejected from the EU against their will, a ghastly state of affairs that could all too easily lead to the internal fragmentation of the Kingdom unless handled with extreme care.

The rating agencies are already pricing in a different British destiny. Standard & Poor’s declared that Brexit “spells the end” of the UK’s AAA status. The only question is whether the downgrade is one notch or two, and that hangs on Holyrood. Moody’s has cocked the trigger too.

Just how traumatic Brexit will be depends on whether Parliament can rise to the challenge and fashion a credible trade policy – so far glaringly absent – to safeguard access to European markets and ensure the viability of the City, and it depends exactly how Brussels, Berlin, Paris, Rome, Madrid, and Warsaw react once the dust settles. Both sides are handling nitroglycerin.

Angry reproaches are flying in all directions, but let us not forget that the root cause of this unhappy divorce is the conduct of the EU elites themselves. It is they who have pushed Utopian ventures, and mismanaged the consequences disastrously. It is they who have laid siege to the historic nation states, and who fatally crossed the line of democratic legitimacy with the Lisbon Treaty. This was bound to come to a head, and now it has.

The wild moves in stocks, bonds, and currencies this morning were unavoidable, given the positioning of major players in the market, and given that the Treasury, the International Monetary Fund, and the Davos brotherhood have been deliberately – in some cases recklessly – stirring up a mood of generalized fear.

But let us separate the noise from what matters. This is not a ‘Lehman moment’. The sterling rout has not been as bad as some feared.  You could almost say that we have had a miraculous reprieve, at least for now.

The pound has fallen by 6pc to €1.23 against the euro, slightly below where it was in April. This is a far cry from warnings of parity, never credible since the eurozone itself faces an existential risk if Brexit is bungled.

The slide against the US dollar has been steeper, but at $1.37 ‘cable’ is only down 4pc from its trading range over the last four months. The apparent violence of the drop was amplified by the upward spike hours earlier.

The FTSE 100 is down just 3.15pc, cushioned of course by the effects of devaluation on repatriated earnings. The broader FTSE 250 index has fallen 7pc. There are horror stories: house-builders Persimmon and Taylor Wimpey have crashed by more than 25pc; Barclays is off 17.7pc.

It is unpleasant but it is not a systemic financial crisis, and it is not global. The S&P 500 index of Wall Street stocks opened down 2.6pc, a bad day but not a drama. The warnings of inter-galactic destruction already look like a campaign hoax.

The yield on 10-year Gilts has dropped almost 29 basis points to an historic low of 1.08pc, the result of flight to safety, recession fears, and hopes of more quantitative easing. These collapsing borrowing costs expose the fallacy behind George Osborne’s ‘punishment Budget’.

There was never any chance that Parliament would enacted his demented plan to crash the economy with a violent fiscal squeeze when macro-economic logic called for the exact opposite. His credibility is shattered. He must go immediately....MUCH MORE
*That's Churchill in his "Finest Hour" speech.
I was actually thinking of a line in the paragraph immediately preceding the snippet quoted above:
...However matters may go in France or with the French Government, or other French Governments, we in this Island and in the British Empire will never lose our sense of comradeship with the French people....
Those final two paragraphs constitute the peroration of the speech and pretty much cemented C-dog's reputation as a guy who talked good English.

We didn't do anything with Ambrose's widely linked Brexit pieces as we weren't posting on anything  Brexit, (except David Keohane's 'Brexit the drinking game' tweet) but if interested here they are:

June 13
Brexit: It is with a heavy heart that I will be voting Leave
June 22
UK and Europe face Mutual Assured Destruction if they botch Brexit

Greenspan: It's The End Of The World As We Know It

And in a a self referential vortex* descending into madness, from ZeroHedge, Greenspan:

Greenspan: "This Is The Worst Period I Recall; There's Nothing Like It"
During a CNBC inteview today, when discussing the historic Brexit vote outcome, Alan Greenspan unleashed a fiery sermon that could have been prepared just by reading a random selection of posts from this website, the former Fed chairman told his shocked hosts that the current period, far from the raging "Obama recovery" spun every day by adaministration propaganda appratchicks and one that prompted the Fed to unleash a ridiculous rate hike cycle in December just as the US is sliding into a recession, and is instead the "worst period" he has seen, surpassing even the infamous Black Monday in severity.

"This is the worst period, I recall since I've been in public service. There's nothing like it, including the crisis — remember October 19th, 1987, when the Dow went down by a record amount 23 percent? That I thought was the bottom of all potential problems. This has a corrosive effect that will not go away. I'd love to find something positive to say."

Of course, what he is referring to was a market shock which was the result of a massive capital account imbalance resulting from the aftermath of the Louvre Accord coupled with the then trendy Portfolio Insurance (in which everyone was on the same side of the boat, much like now) and not so much an all out economic malaise. Which, however, does beg the question when a Black Monday-like market crash is coming?

Rhetorical questions aside, Greenspan was referring to the unprecedented combination of economic stagnation, deteriorating demographics, insolvent entitlement programs, social inequity and wealth division, and of course, a historic debt overhang which could and should have been cleared out in the crash of 2008 but instead was preserved to avoid wiping out the same "equityholders" who also happen to be the Fed's direct and indirect stakeowners.

To be fair, Greenspan, who in recent years has become one of the loudest advocate of gold alongside billionaires such as Druckenmiller and Soros, did not say anything our readers did not know. The former Fed chairman said that the root of the "British problem is far more widespread." He said the result of the referendum will "almost surely" lead to the Scottish National Party trying to "resurrect Scottish Independence." 

Greenspan said the "euro currency is the immediate problem." While the euro and the euro zone were major steps in a movement toward European political integration, "it's failing," he said.  "Brexit is not the end of the set of problems, which I always thought were going to start with the euro because the euro is a very serious problem in that the southern part of the euro zone is being funded by the northern part and the European Central Bank," Greenspan said....MORE
*Credit Alphaville's Cardiff Garcia for the "vortex" as referenced in "Why strange loops could be an argument for artificial intelligence".

Meanwhile Paul Krugman is a little ray of sunshine:
Brexit: The Morning After, by Paul Krugman, NYTimes: Well, that was pretty awesome – and I mean that in the worst way. ...
That said, I’m finding myself less horrified by Brexit than one might have expected – in fact, less than I myself expected. The economic consequences will be bad, but not, I’d argue, as bad as many are claiming. The political consequences might be much more dire; but many of the bad things I fear would probably have happened even if Remain had won.
Start with the economics. Yes, Brexit will make Britain poorer. It’s hard to put a number on the trade effects..., but it will be substantial. ...
But right now all the talk is about financial repercussions – plunging markets, recession in Britain and maybe around the world, and so on. I still don’t see it. ...

Native Advertising In The Age of Brexit

Native advertising is a type of disguised advertising, usually online, 
that matches the form and function of the platform upon which it appears.

Here are a couple examples of the evolution of native advertising over the last few weeks:

May 26 
Is the atomic weight of cobalt 58.9?
...Is this an egregious attempt at native advertising for Camp Alphaville? You betcha.
Note the self-awareness, the self-conscious pointing out of what once was almost considered an ethical transgression. Compare with:

June 24
We’ve reloaded the Brexit research pack in the Long Room…
It’s on the Strategists table, in the usual place.

The Long Room is our virtual library, reserved for finance professionals. Membership is free, but you have to fill out a form here and wait for us to ok your application.

Applications are processed quicker if you’ve bought a ticket for Camp Alphaville – which is happening in London on Friday, July 1....MORE
The brazen "Bloody hell, I suppose I'll have to secure the property and keep the whole damn edifice afloat myself" subtext comes screaming through.

Or maybe that's just me.

On the other hand, the good news is, as the WaPo's Joel Achenbach said:

(Rule one of blogging is that the End Of The World will be good for page views.)

"...IMF calls on UK and EU to play nicely during divorce proceedings"

"We take note of the decision by the people of the UK...."
-Christine Lagarde
Yes.
We also noted it.

From City AM:
The head of the International Monetary Fund (IMF) has urged the UK and the EU to reach an amicable divorce, as the fallout from the vote for Brexit ripples across the world.

Christine Lagarde, who warned Brexit could trigger a recession, called on both sides to work together to reach a new settlement which helps to minimise turmoil on the financial markets.

She also welcomed steps taken by central banks to ensure markets have access to emergency funds to prevent the kinds of sharp movements which were driven by weak liquidity during the darkest days of the financial crisis.

In a statement issued this afternoon, Lagarde said:
"We take note of the decision by the people of the UK. We urge the authorities in the UK and Europe to work collaboratively to ensure a smooth transition to a new economic relationship between the UK and the EU, including be clarifying the procedures and broad objectives that will guide the process."
The call comes as the two sides appeared at odds over how quickly the UK should begin the painstaking process of formally exiting the EU. David Cameron said he will leave the decision to trigger Article 50 - the mechanism by which a member can leave the EU - to his successor, who is expected to be in place by October.
How well the UK performs is now dependent on whether the fallout from Brexit is "limited" or "adverse", according to the IMF.
...MORE 

In other news, the Spanish are thinking of firing up an armada to retake Gibralter and the Cornish Pasty Association is in anguish.

Keeping Things In Perspective











And many more.

"It's Not The Despair....

...I can stand the despair. It's the hope."
-"Clockwise"


Thursday, June 23, 2016

Russia, Belarus Consider Rebuilding Fertilizer Monopoly

From Reuters via CNBC:

UPDATE 2-Belarus may revive potash cooperation with Uralkali
The Republic of Belarus said it might cooperate with Uralkali, the first sign the two sides might work together since the Russian potash producer broke off an alliance in 2013 and triggered a drop in global prices.

Belarus President Alexander Lukashenko's comments on Thursday sent shares of rival potash companies higher as previous co-operation between the world's two biggest miners of the crop nutrient helped manage supplies and underpin prices.

Potash Corp of Saskatchewan and Mosaic Co gained 6 percent in New York, while Germany's K&S AG added 5 percent in Frankfurt.

Uralkali is the world's biggest potash producer, while state-controlled Belaruskali ranks second.
"New Uralkali shareholders are coming to me every month saying: 'Accept us,"' Lukashenko said at an event in Minsk, Belarus' capital. "We are not against it. Let's unite, on our conditions.
"Let's resume work and agree how much we will produce."

Lukashenko did not disclose his conditions. The previous joint venture was based in Minsk, which was then a crucial condition for Belarus and the main concern for Uralkali.

Uralkali declined to comment. Its major shareholder, Uralchem, was not available for comment.
The collapse of Uralkali's joint venture with Belaruskali caused competition to intensify and drive down prices, which have not fully recovered.

Talk of cooperation among major players comes after Germany's K&S AG said this week it would carefully manage output of its new Canadian mine, Scotiabank analyst Ben Isaacson said.
"We think there could not be a better signal for investors to revive optimism," he said....MORE

News You Can Use: "The Weird World Of Expensive Wine "

Following up on Sunday's "Alternative Investment With Liquidity: 2015 Bordeaux First-growth Up 60% From 2014".

From FiveThirtyEight:

Cases of a 2000 Bordeaux from Chateau Latour stacked up at Du Vin in West Hollywood.
William Koch — yes, one of those Kochs — is giving a tour of his wine cellar when he asks the obvious question: “Did you see the wine bathroom?” he asked. “Wanna see it?”

It’s an opulent cellar, replete with Roman mosaics, a Guastavino-style ceiling and a Dionysian bust. The bathroom is, one can’t help but assume, where Koch and his guests unzip the flies of tailored Brioni suit pants and catch final glimpses of $1,000 bottles of Burgundy and Bordeaux, since metabolized and micturated.

But some of Koch’s bottles will now meet different ends. Koch gave a tour of the wine bathroom for a promotional video ahead of the sale of more than 20,000 bottles from his cellar, at Sotheby’s, in New York. The sale, which took place over three days last month, fetched $21.9 million, going down as one of the richest wine auctions in history.

I watched the sale’s final day unfold, fascinated — and a little dismayed — by the wines fetching these handsome sums, where they came from, and where they were going. Questions like that are sparks a FiveThirtyEight writer is obligated to kindle.

Off I went in search of data, and I found it in the form of a juicy, dense spreadsheet containing 140,000 wines from 10,000 producers in 33 countries, and their prices. The data was sent to me by Peter Krimmel, the CTO of Vinfolio, a fine wine retailer. It’s wide-ranging, assembled by the company using auction results from 12 major houses, including Sotheby’s, representing “the vast majority of the fine wine auction market.” For the 140,000 wines covered, it has data on the producer, year (the wine’s vintage), bottle size, region, subregion, American Viticultural Area (where applicable), color (red, white or rosé) and price.

After quaffing the data, what I found was a high-end wine market, and a blockbuster auction, with notes of geography, chemistry, economics, culture and thousands of years of history — with a detectable aroma of bullshit. Let’s have a taste.

France
“Starting in Bordeaux, with the Latour,” auctioneer Jamie Ritchie said, as he opened the Koch sale’s third and final day. Bids flew in via the telephone, the Sotheby’s website, and the floor of the auction room on New York’s Upper East Side. It was a good place to start the day — no place gives a better introduction to the history, and economics, of wine than France.

Château Latour, in Pauillac in southwestern France, traces its history back to 1331. It was a favorite of Thomas Jefferson’s. Koch had set out to collect a thorough “vertical” of the wine — owning at least one bottle of Latour from each of the past 100 years. Today, Latour sits at or near the apex of the some 7,000 producers in France’s Bordeaux wine region. It’s a storied region; the Romans were the first to cultivate vineyards there. Millennia later, it’s a useful place to show what almost any wine drinker knows: The older stuff is the pricey stuff.1
roeder-wine-1
In Bordeaux, as almost anywhere else in the world of fine wine, wines get more expensive as they get older, and that effect accelerates the older the wine becomes.2 There’s a lot going on here — aging and its complex chemistry, market scarcity (people do sometimes drink the wine, after all), vintages perceived as particularly desirable or undesirable as a result of the weather, the scope of the data set.
The increasing value of older wines is an essentially universal phenomenon in the high-end auction market. But for the rich oenophile, old wines may not be such a bad deal. “Although old wines are expensive, I think they’re actually priced more reasonably than new wines,” Robin Goldstein, editor of “The Wine Trials,” told me in an email. “Old wines’ value is driven by their age-worthiness and verifiable storage history, which really does impact their taste, whereas new wines’ value is driven by critics’ rating scores and hyper-inflation in the high end of the market, neither of which correlates with taste.”

Leah Hammer, Vinfolio’s director of cellar acquisitions, echoed this idea. She told me that one reason older wine is expensive is because it was too good to drink right away. So, say 1960 was a bad year for Bordeaux wine because of weather. The bottles from that year would tend to get drunk right away, as the Bordeaux faithful consumed the swill they didn’t think was worth keeping. The best stuff — from 1961, say — was saved for later. Two effects — the aging of the wine and the selection of the good vintages — drive the price increase in the chart above.

The most expensive Bordeaux wine, on average, and one of the most expensive wines in the world, comes from a tiny little place called Château Le Pin. (Two double magnums of 1995 Le Pin were sold for a total of $30,000 at the Koch sale.) It sits on less than seven acres (less than four soccer fields) on Bordeaux’s Right Bank and produces just 5,000 to 6,000 bottles a year. A single bottle averages over $2,000. One other Right Bank producer, Petrus, a 12-minute drive from Le Pin, also cracks the four-figure average. (For those of us who can’t afford a bottle and would like to taste vicariously: Robert Parker, the influential wine critic, found flavors of lead pencil, roasted nuts, smoke, spice, fruitcake, black cherries, white chocolate, cola, kirsch and black raspberry in the 1995 Le Pin.)...MUCH MORE

Wednesday, June 22, 2016

More On SolarCity/Tesla and Fairness Opinions (SCTY; TSLA)

Credit where credit is due.
Looking at the twitter timestamp, this writer was quite a few steps ahead of yours truly in thinking of the exchange ratio, a topic of intense interest to a vanishingly small subset of humanity but actually quite important.*

From FT Alphaville:

Tesla/Solar City: An exchange of ideas

Sorry investment banking analyst, you are going to have work this weekend. As the press release explaining the surprising Tesla offer for Solar City says, Tesla is offering not an explicit price for Solar City but between 0.122x and 0.131x of its shares. And that kind of offer is going to create twice as much number-crunching. A dollar of cash offered is worth… a dollar of cash. But how much is a share of Tesla worth? And why should a share of Solar City be entitled to between 0.122x and 0.131x Tesla shares?

In a formal fairness opinion, the respective bankers are opining on the reasonableness of the exchange ratio, itself. As an example, read the language from Zillow’s stock-for-stock acquisition of Trulia completed last year.
J.P. Morgan rendered its oral opinion to the Trulia board that, as of such date and based upon and subject to the factors and assumptions set forth in its opinion, the Trulia exchange ratio in the proposed mergers was fair, from a financial point of view, to the holders of the Trulia common stock.
And so JP Morgan, Trulia’s advisor, first simultaneously valued Trulia and Zillow. Then from those valuations, it then figured out the corner points for an exchange ratio....MORE
*See, for example, the fact that during today's regular market SolarCity's June 21 afterhours 15% gain on the news of the buyout offer shrank throughout the day to end at a 3.26% premium to the prior day's close.
That 69 cent gain continued to dwindle in today's afterhours action by another 51 cents, giving a net 18 cent move after all the hubbub.

Tesla's $22.95 whack was a part of SCTY's lack of exuberance, along with a slew of bets on whether the deal even gets done.
Tesla traded up a buck after today's close.

Related:
So, Who Will Write A Fairness Opinion On The Tesla/SolarCity Deal? (TSLA; SCTY)
SolarCity/Tesla: Analysts React (SCTY; TSLA)

Ha! The English Are Different

We have studiously avoided contributing to the almost overwhelming blather but this is too fortuitous a chance at juxtaposition to pass up.
Alphaville's Matthew Klein flags this line:
"many of the leaders of the Remain camp are of Norman origin, 
while most of the leaders of the Leave campaign are Anglo-Saxon" 


Which naturally enough leads us directly to a sometimes jingoistic wordsmith (and pretty good rhymer):

Norman and Saxon

A.D. 1100
    "MY son," said the Norman Baron, "I am dying, and you will be heir
    To all the broad acres in England that William gave me for my share
    When we conquered the Saxon at Hastings, and a nice little handful it is.
    But before you go over to rule it I want you to understand this:-- 
     
    "The Saxon is not like us Normans. His manners are not so polite.
    But he never means anything serious till he talks about justice and right.
    When he stands like an ox in the furrow with his sullen set eyes on your own,
    And grumbles, 'This isn't fair dealing,' my son, leave the Saxon alone. 
     
    "You can horsewhip your Gascony archers, or torture your Picardy spears;
    But don't try that game on the Saxon; you'll have the whole brood round your ears.
    From the richest old Thane in the country to the poorest chained serf in the field,
    They'll be at you and on you like hornets, and, if you are wise, you will yield. 
     
    "But first you must master their language, their dialect, proverbs and songs.
    Don't trust any clerk to interpret when they come with the tale of their wrongs.
    Let them know that you know what they're saying; let them feel that you know what to say.
    Yes, even when you want to go hunting, hear 'em out if it takes you all day. 
     
    "They'll drink every hour of the daylight and poach every hour of the dark.
    It's the sport not the rabbits they're after (we've plenty of game in the park).
    Don't hang them or cut off their fingers. That's wasteful as well as unkind,
    For a hard-bitten, South-country poacher makes the best man-at-arms you can find. 
     
    "Appear with your wife and the children at their weddings and funerals and feasts.
    Be polite but not friendly to Bishops; be good to all poor parish priests.
    Say 'we', 'us' and 'ours' when you're talking, instead of 'you fellows' and 'I.'
    Dont' ride over seeds; keep your temper; and never you tell 'em a lie!"
     
    -Rudyard KiplingSongs Written for C.R.L. Fletcher's "A History of England" [1911]

SolarCity/Tesla: Analysts React (SCTY; TSLA)

Not only is Tesla taking on almost $3 billion in SolarCity debt, it is also buying into the problem of even more negative cash flows, both Operating and FreeCashFlow.

Which of course, along with the corp. governance nastiness, explains why Tesla has lost almost 11% of its market cap, amounting to $3.14 billion on the 133 million shares out and more than the entire market cap for SCTY (98,296,422 shares at $22.30, up 5.2%).

The market is saying SCTY is worth less than zero to Tesla.

We'll have a lot more to say about this in the coming days.
In the meantime here's hoping the stock closes down $23.454 on the day so I can make humble pi jokes.

From MoneyBeat:
Elon Musk is shuffling his chips again.

Mr. Musk’s Tesla Motors on Tuesday made an acquisition offer to, well, to Mr. Musk’s SolarCity The two companies count Mr. Musk as both chairman and their largest shareholder. The idea is to have one company, with one brand name, producing electric cars, batteries, and solar panels. It would also make Tesla an even more complicated company, and add an unprofitable operation to its already-strained finances.

Here’s what the Street had to say:

Colin Langan, UBS (Rates Tesla sell, SolarCity neutral) We are cautious on the deal as synergies seem limited, it adds complexity, and most importantly it could potentially be an unneeded distraction for Tesla management.

Tesla already is facing aggressive Model 3 production targets of 500,000 by 2018 and the production ramp of the Model X has been slow. Adding SolarCity may increase the operational and accounting complexity as the business is very different from auto and storage. Although SolarCity would only be ~10% of combined Tesla-SolarCity sales, SolarCity’s GAAP losses could be a significant drag. SolarCity would continue to require at least upfront upfront capital investment to grow its business, likely increasing overall cash burn for Tesla.

SolarCity and Tesla have worked together on a battery offering, and there may be some potential future synergies on the SG&A front, but we note Elon Musk was unaware of how many Tesla customers have solar – implying customer acquisition synergies may not be the primary focus.

Pavel Molchanov, Raymond James (strong buy rating on SolarCity) The key word, of course, is “proposal.” This is not a done deal, and we are skeptical that the initial terms will prove acceptable to SolarCity’s board. Put simply, we think there is a deal to be made here, but at a higher price point.

Historically, the stock has traded at more than two times and even three times [net present value], and while that is probably not realistic for the foreseeable future, a takeout multiple of (at best) 1.35x NPV does not look very appealing. Because this stock is (as always) a special situation, there is no objective way to gauge what is the right multiple, but we think that a $30+ deal value would be more appealing, both “optically” and fundamentally.

Sven Eenmaa, Stifel (downgraded SolarCity to hold from buy) Reward to risk looks balanced on proposed acquisition price. The proposed acquisition price is 26%-36% above SCTY’s 7/21 closing price, but is at the range midpoint only marginally above SCTY’s 2016 YTD average closing price of $26.95. Nevertheless we would expect Tesla’s proposal to set the baseline for SolarCity’s acquisition valuation, particularly given Elon Musk’s 22% ownership and role at SolarCity, and given recent risk perceptions around SolarCity’s growth and financing strategy execution, which would benefit from increased backing from a company such as Tesla. With Tesla’s proposal pointing to an intent to negotiate and complete the combination in an expedited manner, and given the complexity of and recent execution challenges at SolarCity, we see very limited potential for competing bidders to emerge....
...MORE

So, Who Will Write A Fairness Opinion On The Tesla/SolarCity Deal? (TSLA; SCTY)

Some years ago I got caught in a similar situation.

The CEO of the company we were long was the largest shareholder of a struggling little manufacturer he had spun out of our holding some years prior and now wanted to reacquire in a stock-for-stock deal.
The net result would be to increase his percentage ownership of our holding with no positives for us from the combined companies that we could see.

Now the thing to know about fairness opinions in situations where both companies are publicly traded is no matter how gussied up with jargon and analysis they basically come down to the acquirer paying some percentage of the acquiree's stock price over some period of time, often the 90 days prior to the date of the fairness opinion on the deal.

Here's the chart on SCTY from FinViz:
SCTY SolarCity Corporation daily Stock Chart
Over the next couple days we'll be back with a meatier piece or five on SCTY, including how we dealt with that CEO, but that long ago deal was the first thing I thought of when I saw the news. The second thing I thought of was the insty-intro to last year's post on Musk's SpaceX funding Musk's SolarCity:
One of the things they teach you in Junior Forensic Analyst school: watch for related party transactions.
One of the things they don't teach you, extrapolating this discovery to the logical question: "How important is cost-of-funds to SolarCity's very survival?"...
At the time I hit publish on that post SCTY was at $52.25 down $3.09 on the day.
Just to memorialize the numbers for handy reference, the stock closed yesterday at $21.19 before the news broke. After hours it jumped 15.01% ($3.18) to $24.37

Tuesday, June 21, 2016

Questions America Wants Answered: "What exactly is Transferwise?"

It is starting to sound a bit like a black-box scam.*
From FT Alphaville:

What exactly is Transferwise?
For a company that prides itself on transparent fee structures, Transferwise — the UK-based FX money transmitting unicorn — has a fairly opaque way of delivering attractive exchange rates.

Competitors who have tried to reverse engineer TW’s rates have struggled, not least because pure brokerage models are not supposed to take principal trading risk when they aren’t able to immediately match buyers and sellers in the market.

To the contrary, they pass orders onto the wholesale interbank market through properly licensed institutions who take on the risk of supply/demand imbalances in their place. But this, alas, means brokers have to factor in the cost of wholesale liquidity, which inadvertently puts a floor on how low their own customer fees can go (at least if they plan to break-even).

So on the one hand, brokers who don’t take risk on to their balance sheets have to pay to access wholesale markets. And on the other hand, FX operators who do take principal risk generally charge a premium to cover the risk of warehousing imbalances on their own balance sheet.

Transferwise CEO Taavet Hinrikus freely admits the company is highly dependent on third party liquidity. Some cross-rates the company offers aren’t matched on their own platform at all, thus are 100 per cent dependent on interbank liquidity.

In the past Hinrikus has declined to divulge the exact ratios the company matches directly, but he did tell Bloomberg’s Jeremy Kahn earlier this month that at least 60 percent of its transaction volume on 20 “routes” among Europe, the U.S., the U.K., and Australia does get offset in this way....MORE
*Here's an audacious one from The Guardian and the New York Daily News' "Con artists sentenced to jail after $10 million Monopoly money scam in England":
Go directly to jail. Do not pass Go. Do not collect $200.

A group of con artists were sentenced to jail Monday after scamming jewelry dealers in England out of almost $10 million.

Gianni Accamo, 44, Dusica Nikolic, 45, Dragoslav Djordjevic, 44, Juliano Nikolic, 26, and Bruno Nikolic, 27, were sentenced after ripping off English dealers by hiding stacks of Monopoly money inside real euro notes, according to The Guardian.

In the heist, the group swindled London jeweler John Calleija — whose clients include Zara Phillips and Colin Firth — out of more than $8.5 million.

Accamo posed as a gem expert and met Calleija in a Covent Garden hotel to inspect the precious stones.

After agreeing on a price, Calleija used a cash-counting machine to verify the total, the Guardian reported.

After he was convinced, Accamo and his crew switched the real euros for Monopoly money, then picked up the jewels at the store.

Calleija said he didn’t realize he’d been scammed until the thieves were long gone.

“You can imagine the horror when he goes to check the cash. It is immediately apparent it is not the same that he had counted in the hotel. It’s counterfeit,” prosecutor David Hughes said in court....MORE
Not saying that Transferwise is doing anything illegal. just that when they can't explain how they do that voodoo that they do so well it flies a ruby (so to speak) banner at ya.

"WTI Crude Spikes Above $50 On Massive Inventory Draw"

August futures 50.28 +0.32.
From ZeroHedge:
Having v-shape recovery-ed intraday - as Nigeria news came and was denied - WTI Crude (Aug) was hovering around $49.90 before API data hit.Following 4 weeks of crude draws in a row, and with expectations of a 1.15mm draw, API reported a massive 5.2m barrel draw - the most in 6 months. Across the entire complex, inventories drew down more than expected, sending WTI surging back towards $50.50.

API
  • Crude -5.22m (-1.7m exp.)
  • Cushing -1.311m (-50k exp.)
  • Gasoline -1.47m (-300k exp.)
  • Distillates -1.699m (+300k exp.)
...MORE

That's a big pull but I'm a little surprised the price action isn't even more dramatic.
For the last three weeks we've seen non-confirmation from the EIA so that may be part of the reticence.

Related:
"With Oil Price Near $50, Resilient U.S. Shale Producers Eye New Chapter"

"With Oil Price Near $50, Resilient U.S. Shale Producers Eye New Chapter"

With 15 minutes to the API numbers the new front futures (August) are changing hands at $49.72 off 24 cents.
From Reuters:
Two years into the worst oil price rout in a generation, large and mid-sized U.S. independent producers are surviving and eyeing growth again as oil nears $50 a barrel, confounding OPEC and Saudi Arabia with their resiliency.

That shale giants Hess Corp (HES.N), Apache Corp (APA.N) and more than 25 other companies have beaten back OPEC's attempt to sideline them would have been unthinkable just months ago, when oil plumbed $26 a barrel and collapses were feared.

To regain market share, the Organization of the Petroleum Exporting Countries in late 2014 pumped more oil despite growing global oversupply. It aimed to drive prices lower and force higher-cost producers out of the market, with shale oil seen as especially vulnerable.

The pain was acute. Industry revenue fell more than 30 percent in 2015 from the previous year, the U.S. drilling rig count dropped by more than 70 percent from when oil was still above $100 per barrel, stock valuations plunged and scores of small producers filed for bankruptcy. 


But so far no U.S. producer that pumps more than 100,000 barrels per day (bpd) has gone bankrupt. The survival of these big producers partly explains why overall U.S. production has slipped only about 10 percent since peaking at 9.69 million bpd.

Their agility - which required slashing costs in half while doubling down on improved techniques to squeeze more oil from each new well - is now allowing the industry to cautiously focus on growth again.

But this time, U.S. producers say they will stay focused on capital returns, having abandoned a culture of maximizing production regardless of costs....MORE

"Big Banks Are Stealing a Silicon Valley Business"

Speaking of creatively procuring, one of the classic ploys from the bad old days was to identify a company with intellectual property you coveted and convince them to take on debt.
Then trip them.
Et voilà!

From CNBC:
The venture debt business is growing as larger start-ups prefer to borrow rather than issue equity.
Wall Street banks are horning in on a tried-and-true Silicon Valley business.
And they're doing it at a crucial time.

Investors and executives say Silicon Valley fundraising for start-ups is stalling, right at a time when many need cash to support operations. Few are eager to do a down round — accept investor capital at a lower valuation — leaving them in need of a little leverage to get by. It means doing a deal for venture debt. Enter banks like Goldman Sachs, which are eager to underwrite debt for pre-IPO companies.

"As start-ups stay private longer, there's a broader need for venture debt to support operations," said one source who invests with big, pre-IPO companies. "It's on the rise, with companies that can get it."
Lately, there are a number of boldface-name start-ups that can: Uber, Airbnb and Spotify, and those are just the ones that raised $1 billion or more so far this year alone.

Various factors go into the growing trend toward venture debt: For Silicon Valley companies weighing an IPO, the extra cash lets them hold off on decision-making and focus on growth. The market hasn't exactly been friendly to companies looking to make public market debuts, and taking on VC money may be more difficult: At a time when venture capitalists have been raising more funds, their investing in start-ups began to decline earlier this year.

Goldman Sachs has been involved in the venture debt deals of several top start-ups, including Uber and Spotify. The bank declined to comment.

Other banks in on the action include Morgan Stanley, Barclays and Citigroup. As is the case with corporate debt placements, big banks have the option of keeping the debt on their books as an investment, or selling it to related parties and clients (or both). Each of the banks declined to comment....MORE

Saudi Money Supply Growth Continues Collapse

Sticking with the money supply theme that seems to be developing.*
From Professor Hanke writing for Cato@Liberty:

That Saudi Sinking Feeling
The rate of growth in a country’s money supply, broadly measured, will determine the rate of growth in its nominal GDP. For Saudi Arabia, the following table presents a snapshot of the relationship between the growth in the money supply (M3) and nominal GDP.
The chart below shows the course of M3. Following the oil price plunge of September 2014, the growth in M3 has slowed. The rate of nominal GDP growth will follow.
Why is the money supply growth rate declining? Since the plunge in oil prices, the Saudis’ current account has dipped into negative territory. This has to be financed, and the Saudis have used their stash of foreign reserves to do the financing. 
When the Saudi Arabian Monetary Agency (SAMA) sells foreign currency to finance the current account deficit (and maintain the Riyal/USD peg), it debits the reserve accounts (in Riyals) of the Saudi banks at the SAMA. This causes the domestic money markets to tighten, which works its way through the banking system. Not surprisingly then, there has been a marked slowdown in the growth of broad money since the oil price plunge and associated current account deficit....
...MORE

*Dear Fed, We May Have A Problem: Base Money Supply Trend Remains Negative Through May
Japan: "Abenomics as epic fantasy"

See also Sunday's:
U.S. Officials Fear Saudi Collapse If New Prince Fails

Gold's Failed Breakouts

August futures $1273.3 -18.80.
From Slope of Hope:

And this sure didn’t help either.
Here's the longer term view via FinViz:

What could have been a picture perfect cup-n-handle is now a double top at the $1309 area. 
Plus, the picture perfect C&H has the handle angle down a bit to wash out the hopers and dreamers rather than sticking out at 90° or worse angling up on the chart as in the current case.