Saturday, December 3, 2016

"Winton Capital’s David Harding on making millions through maths"

This article was at FT Weekend a week ago and got set aside in our queue of links. It should have gotten wider attention.
It's a very solid look at one of the smarter and more intellectually flexible people in fund management.
As an example, despite personally backing 'remain' on the Brexit vote to the tune of $5 mil., he was one of the few managers to make money off the 'Leave' result.
See the FT's "Hedge funds win big from Brexit bets".

Plus, the last time I looked he had just over $100 million worth of NVIDIA,what more needs to be said?
(just kidding, I'm  not really that arrogant)

Here's Winton's performance vs. the S&P and the BarclayHedge index (BTOP50):
From FT Magazine:

The founder of the $32bn hedge fund talks about physics, philanthrophy and why he believes in tax
In 1994 the Philosophical Transactions of the Royal Society, a leading scientific journal, published an unusual paper. Entitled “Making money from mathematical models”, it was authored by a young financial trader in London. His name was David Harding, he was a Cambridge physics graduate and he used the paper to lay out what he saw as the “intellectual front line” of investment research. Harding’s idea was that finance could use science to identify and exploit inefficiencies in the markets.

He was right. Today Harding is worth about £1.3bn and, in the course of putting those initial ideas profitably into action, has become one of Europe’s leading financial entrepreneurs. His privately owned investment company Winton Capital (for which he reluctantly accepts the “hedge fund” label) manages $32bn of assets. When I take a copy of his Royal Society publication out of my briefcase, his face breaks into a slightly mischievous smile. “I’m terribly impressed that you have a copy of my one and only scientific paper,” he says.

Harding’s tale begins with a mathematically minded boy, who became interested in investing while helping his civil servant father manage a modest share portfolio. Today, he is based at Winton Capital’s headquarters in Hammersmith — well west of the districts favoured by London’s financial community. On the approach from the Tube station, the long, low-rise building, originally constructed in the mid-20th century, looks underwhelming. A queue of people stretches outside the Job Centre that occupies the first section of the shared block.

Once through Winton’s doors, however, the ground floor opens up into a spacious waiting area, its curvaceous reception desk illuminated with recessed red lights. Much of the art on display has a scientific theme, including a series of large Raoul Dufy prints from 1937, celebrating science and technology.

Harding’s career is founded on the relentless pursuit of mathematical and scientific methods to predict movements in markets. This is a never-ending process because predictive tools lose their power as markets change; new ones are always needed. “We have 450 people in the company, of whom 250 are involved in research, data collection or technology,” he says. That is equivalent to a medium-sized university physics department.

After graduating, Harding began work as a financial trader. Over five years he began to see potential profit in adopting a more mathematical approach — and, in 1987, he co-founded AHL as a commodities trading firm with two other young physicists, Michael Adam and Martin Lueck. Their success, using quantitative methods, led to AHL’s purchase by Man Group in 1994. Harding struck out on his own in 1997, setting up Winton (he gave the company his middle name) with the aim of building a more substantial investment business on the back of empirical scientific research.

In his 1994 paper, Harding wrote that the methods with which conventional banks and brokers make money from trading have “all the intellectual purity of selling vegetables”, a phrase he uses again during our interview. As well as taking clients’ fees, these methods consist essentially of selling complex derivatives at marked-up prices and of arbitrage (taking advantage of small differences in the price of financial instruments on different markets).

Harding has a different approach. He exploits failures in efficient market theory — “the idea that markets are always rational, that they perfectly reflect all knowable information and always produce in some sense the ‘right’ price”. This theory still has a grip on western economic thinking, he says, despite much evidence that it is wrong. “It treats economics like a physical science when, in fact, it is a human or social science. Humans are prone to unpredictable behaviour, to overreaction or slumbering inaction, to mania and panic.”

The Winton investment system is based instead on “the belief that scientific methods provide a good means of extracting meaning from noisy market data. We don’t make assumptions about how markets should work, rather we use advanced statistical techniques to seek patterns in huge data sets and base all our investment strategies on the analysis of empirical evidence. We conduct our research in the manner of a science experiment — collecting and organising data, making observations and developing hypotheses and then testing these hypotheses against empirical evidence.”

Harding emphasises the breadth and volume of investments involved, covering bonds, currencies, commodities, market indices and individual equities. The aim is to exploit a large number of weak predictive signals, he says: “We don’t expect to find any strong relationships between data and the price of the market. That may sound counter-intuitive but if there are strong relationships, someone else is going to be exploiting those. Weak relationships are where we have a competitive advantage.”...MUCH MORE
As the author of the piece, the FT's science writer   points out, the approach is similar to that of Renaissance Technologies.

No kidding.
Compare the paragraph immediately above with this from Nov. 21's "Inside Renaissance Technologies' Medallion Fund: A Moneymaking Machine Like No Other (and President-elect Trump's Sharpe ratio)";
...At the 2013 conference, Brown referenced an example they once shared with outside Medallion investors: By studying cloud cover data, they found a correlation between sunny days and rising markets from New York to Tokyo. “It turns out that when it’s cloudy in Paris, the French market is less likely to go up than when it’s sunny in Paris,” he said. It wasn’t a big moneymaker, though, because it was true only slightly more than 50 percent of the time. Brown continued: “The point is that, if there were signals that made a lot of sense that were very strong, they would have long ago been traded out. ... What we do is look for lots and lots, and we have, I don’t know, like 90 Ph.D.s in math and physics, who just sit there looking for these signals all day long. We have 10,000 processors in there that are constantly grinding away looking for signals.”... 
Brown is Peter Brown, Co-Chief Executive Officer of RenTech.

Friday, December 2, 2016

Uber Is Now Tracking You After Your Trip

From TechCrunch:

Uber begins background collection of rider location data:
Imagine you’re on your way to a therapy appointment in a downtown high-rise. You hail an Uber and enter a nearby coffee shop as your destination so you can grab a snack before the appointment. In the car, you scroll through Instagram and check your email. You get out, buy your coffee, and walk around the corner to your therapist’s office.

If you installed the latest app update, Uber has been tracking your location the entire time.
The app update (it’s 3.222.4, for those keeping track) changes the way Uber collects location data from its users. Previously, Uber only collected location information while a user had the app open – now, Uber asks users to always share their location with the ride-hailing company.

Uber says that, even though it can harvest your location constantly while its app is running in the background on your phone, it won’t use that capability. Instead, Uber claims it just needs a little bit more location data to improve its service, and it has to ask for constant access because of the way device-level permissions are structured.

Specifically, Uber wants access to a rider’s location from the moment she requests a ride until five minutes after the driver drops her off, even if the app is not in the foreground of her phone. Previously, Uber would not collect a rider’s background location during the trip, or her location after drop-off.

The company will use this information to improve drop-offs and pick-ups, which have consistently been a pain point for Uber and other ride-hailing services. The most common reason for riders and drivers to contact each other is to communicate their location when the app does not provide an accurate pinpoint, and Uber hopes to cut down on confusion during pick-up.

Uber also wants to track how often riders cross the street directly after a drop-off, which the company believes could indicate a safety hazard. Riders shouldn’t have to dart through traffic to get to their destination, a spokesperson explained, and tracking a user after drop-off can help the company detect whether the driver dropped their passenger off in a risky place.

“We’re always thinking about ways we can improve the rider experience from sharpening our ETA estimates to identifying the best pick up location on any given street. Location is at the heart of the Uber experience, and we’re asking riders to provide us with more information to achieve these goals,” an Uber spokesperson said in a statement....MORE

June 2015 
Corrected--Starting July 15 Uber Will Track Your Location Whether You're Using the App Or Not
...An Uber spokesperson has clarified to Engadget that tracking passengers in real time and accessing users' address books are merely "potential new use cases." The company has no solid plans to roll those features out at the moment "We are not currently collecting this data and have no plans to start on July 15,"

November, 2014
UPDATED--Here's the Real Problem With Uber: You Can't Trust Them

"Tesla's Shares Are On A Slippery Slope" (TSLA)

The stock is at $180.32 down $180.32 (-0.86%) after trading down to $180.00.

From Forbes:
In the space of two months early this year Tesla’s shares almost doubled from $141.05 on February 9th to $269.34 on April 7th. However from a technical perspective they did not trade higher than the September 2014 intra-day high of $291.42 or July 2015’s $286.65. As can be seen in the chart below this was the start of an eight month downward movement of lower highs and lower lows.

I believe the combination of Tesla buying SolarCity and overall news flow turning negative on the company has led to the steady march downwards. The company’s stock dropped from $219.61 on June 21, the day the proposed merger was announced, to $196.66 the next day. It rallied until early August when it hit $236.63 but as can be seen in the chart that has formed a downward trend line from its early April peak.

Additionally recent news items such as the SEC saying that Tesla used “tailored accounting” in its August earnings release to Consumer Reports writing that the company was “showboating” and that “One of the things that frustrates us about the Model X is that Tesla went for needless flash over function.” are definitely not helping the shares.  Also having groups asking Telsa to stop using Autopilot in its marketing (I agree that it is not Autopilot) is another negative story.

It would not surprise me to see Elon Musk leverage the faith investors have in him or the company go on the positive spin offensive. Just yesterday Tesla sent invites to some investors for a January 4 tour of the Gigafactory and Musk makes off the cuff (but I’m sure planned) remarks such as another major announcement for the Model 3 will be in three or four months (said at the shareholder meeting on the SolarCity merger).

Stock needs to hold the $177 level
Excluding the stock market downdraft in early 2016 there is a key technical level at $177 (reached on May 9, 2014) and to a degree $181.40 (low on March 27, 2015) that the stock needs to stay above. If the shares start to trade below these prices and don’t stage a rebound the next support level is in the high $130’s to low $140’s....MORE
A Short-Seller Talks Tesla (TSLA)

Climateer Line of the Day: Oil Realpolitik Edition

Today's winner of the prestigious CLoD is former Saudi Oil Minister Ali al-Naimi:
"The only tool they have is to constrain production," the 22-year Saudi oil minister Ibrahim Al-Naimi told an audience in Washington at the Center for Strategic and International Studies think tank. "The unfortunate part is, we tend to cheat," he said.
-Washington Examiner, Dec. 2, 2016 

The futures are trading 'heavy', here's Brent but the pattern is similar in WTI:


Brent is trading at $54.09 up 15 cents, WTI $51.35 up 29 cents.

Ahead Of This Weekend's Votes In Italy and Austria: Is Doom Bad For The Stock Market?


Unless it's doom like getting caught on the wrong side of the Denarius/Shekel pair in A.D. 70 where it wasn't just the FX guys but the real estate developers out at the "Future site of Masada Manor" who got hammered.
Then it's a problem and you should probably brush up on your Latin.

From CXO Advisory:
Is proximity to doom good or bad for the stock market?
To measure proximity to doom, we use the Doomsday Clock “Minutes-to-Midnight” metric, revised occasionally via the Bulletin of the Atomic Scientists, which “conveys how close we are to destroying our civilization with dangerous technologies of our own making. First and foremost among these are nuclear weapons, but the dangers include climate-changing technologies, emerging biotechnologies, and cybertechnology that could inflict irrevocable harm, whether by intention, miscalculation, or by accident, to our way of life and to the planet.” Using the timeline for the Doomsday Clock since inception and contemporaneous annual returns for the Dow Jones Industrial Average (DJIA) during 1947 through most of 2016 (23 doom proximity judgments), we find that:
The following chart relates annual DJIA return (2016 partial) to same-year “Minutes to Midnight” judgment as available over the sample period based on two assumptions:
  1. Changes in “Minutes to Midnight” occur near the beginning of years. For example, the 3-minute proximity to doom for 2015 relates to the 2015 DJIA return of -2.2%.
  2. When there is no change for a given year, “Minutes to Midnight” is that same as the most recently issued judgment. For example, the proximity to doom for 2013 and 2014 is the same as that for 2012.
The Pearson correlation between these two series is -0.04 and the R-squared statistic 0.001, indicating practically no relationship between proximity to doom and annual DJIA return.

Might there be a lag between proximity to doom and stock market return?
The next chart summarizes annual correlations between “Minutes to Midnight” and DJIA annual return for lead-lag relationships ranging from DJIA return leads proximity to doom by five years (-5) to proximity to doom leads DJIA return by five years (5). All correlations are too small to indicate any relationship....MORE

"Economists React to the November Jobs Report: ‘Paves the Way for Fed Rate Hikes’"

From Real Time Economics:
The Labor Department on Friday reported that U.S. nonfarm employers added a seasonally adjusted 178,000 jobs in November and the unemployment rate fell to 4.6%, its lowest level since August 2007. The workforce-participation rate edged lower and average hourly earnings for private-sector workers softened. Here’s how economists and analysts reacted to the news.

Today’s jobs report sets a baseline for the Trump administration. Jobs gains were solid, led by professional and business services and construction. But manufacturing jobs fell yet again in November. The president-elect faces strong headwinds in bringing those jobs back. And recent wage gains and unemployment declines make this a tough economy to improve on.” —Jed Kolko, Indeed
“The decline in the unemployment rate to a new cyclical low of 4.6% last month, from 4.9%, was due to a combination of a 160,000 increase in the household survey measure of employment together with a 226,000 decline in the labor force….The upshot is that the labor market appears to be approaching full employment.” —Paul Ashworth, Capital Economics

This jobs report paves the way for Fed rate hikes. It also tops off a recent run of continually positive economic data.” —Jason Schenker, Prestige Economics

“In our view, this report easily clears the bar for a December rate hike and represents some of the continued progress towards the dual mandate that the committee desires. Of course, it could decide that the tightening of financial conditions since September is sufficiently large to forestall a hike, but we consider that to be very unlikely at this point.” —Michael Gapen and Rob Martin, Barclays
“Overall, the report shows modest job gains, which is not totally unexpected given the uncertainty surrounding the election.” —Joe Carson, AllianceBernstein

“Perhaps the most surprising development was the sharp decline in the unemployment rate, which fell to 4.6%—a nine-year low. Economists had respected it to remain steady at 4.9%. Positive job creation certainly contributed to that drop, but unanticipated declines in the civilian labor force and the labor-force participation rate reduced the estimated rolls of the unemployed by 387,000. It’s quite likely that both of those factors will move higher in the coming months. As such, it’s possible that the jobless rate could edge higher in the coming months—even if the recent trend in job creation remains positive—before resuming its downward trend.” —Jim Baird, Plante Moran Financial Advisors

This was the last hurdle on the path to a December hike, and it has been cleared convincingly. It is now incredibly hard to imagine what would stop the Fed from going. The debate now is all about what rates will do next year and beyond.” —Luke Bartholomew, Aberdeen Asset Management

"Atlanta Fed Raises Q4 GDP Forecast to 2.9%"

From Barron's Income Investing:
With some stronger economic news this week, the Atlanta Federal Reserve’s real-time gross domestic product tracker, known as GDPNow, raised its estimate for fourth quarter growth to 2.9% from 2.4% on November 30.

The model was above 3% most of November. The latest estimate for growth in the third quarter was 3.2%.

Here’s what the model was reacting to Thursday for the fourth quarter reading:
After this morning’s construction spending report from the U.S. Census Bureau, the forecasts of fourth-quarter real residential investment growth and real government spending growth increased from 7.1 percent to 12.4 percent and 0.1 to 0.6 percent, respectively. The forecast of real nonresidential structures investment growth fell from 1.4 percent to -3.4 percent after the same report....MORE

Tesla's European Gigafactory to Produce Cars, Batteries (TSLA)

Of course this doesn't happen unless the company can raise some serious money.
$3 to $12 billion serious.

From ElecTrek, Nov. 8:

Tesla plans to choose location for ‘Gigafactory 2’ in Europe next year, will produce both batteries and cars
Tesla CEO Elon Musk and CTO JB Straubel are in Germany today to announce the acquisition of a German engineering group, Grohmann Engineering. Following the announcement, they held a press conference during which Musk emphasised that Tesla is planning “significant investments” in Germany and the conversation quickly moved to Tesla not only investing in engineering in Europe, but also in production.

Musk confirmed that Tesla plans to choose a location for ‘Gigafactory 2’ in Europe next year and he added that the factory will combine both the production of batteries and complete cars.

It’s an interesting development considering the Gigafactory concept was originally only supposed to manufacture battery cells and packs, but we recently learned that Tesla is planning drive system production lines at the Gigafactory 1 in Nevada.

Now it looks like Tesla will take it a step further and vertically integrate the entire production process in one plant – for the ‘Gigafactory 2’ at least.

During the call early this morning, Musk made it clear that Tesla’s current focus is to bring the Model 3 to production, but he also said that through that process, the company is trying to reinvent their manufacturing strategy now referred to as “the machine that builds the machine”. The acquisition of Grohmann Engineering is part of Tesla’s effort to design that “machine” which will first come alive at Tesla’s Fremont plant, but he added that it will also eventually be deployed in Europe:
“This is something that we plan on exploring quite seriously with different locations for very large scale Tesla vehicles, and battery and powertrain production – essentially an integrated ‘Gigafactory 2’.”
He later referred to the plant as a “combined vehicle and Gigafactory”.
Musk clarified the timing of the new project and said that it will be once Tesla has “a clear handle on Model 3 production next year”. Tesla plans to start Model 3 production in “mid-2017” with volume production in “late-2017”.

Interestingly, he continued by saying:
“It is quite a significant scaling up of the rate because we are going from 100,000 cars a year to 600,000 cars a year in a very short period of time.”...

Also at ElecTrek:
Tesla Gigafactory 2: several countries launch efforts to attract Tesla’s new electric car & battery plant

Tesla acquires German engineering firm to create ‘Tesla Advanced Automation Germany’

"Now You Can Cruise Up To Your Aston Martin Condo In Your Aston Martin Powerboat"

From Forbes:
Now the 99-plus percent can do more than envy the owners of Aston Martin cars. We can envy the owner of Aston Martin powerboats, condos, and clothing.

The British brand synonymous with automotive opulence is in the midst of a huge spasm of brand extension as it seeks to create an Aston Martin "lifestyle" across all sorts of haute categories.
Rebecca Robins, global director of Interbrand, the global branding consultancy based in New York, told me that Aston Martin is among luxury businesses that "are acutely aware of the shift in what we value and why, in an economy that's revolving less around what we own and more around what we share and experience."

So in addition to fine Aston Martin automobiles that may have been inspired by James Bond, these days there's also an Aston Martin "design masterclass" about how the company fashions the cars, ice-driving outings in snowy climes, Aston Martin Residences high above the Miami River, 37-foot Aston Martin powerboats, and a new range of "luxurious clothing" with U.K. menswear retailer Hackett that "reflects the coming together of two stylish brands.

The London-based brand also just revealed a "portfolio of experiences" that it will offer in 2017 by its Art of Living program, which takes customers beyond sports cars and provides them with "the opportunity to live the brand's lifestyle," as the company puts it...

Who on earth are they marketing this to?
Oh wait the boat does look sharp:

Sort of a Chris-Craft throwback, what with the wood decking, but powered at 1040 bhp.
For a 12 meter long boat?

Here's Quintessence Yachts AM37 page.

The King of Zinc Watches and Waits (GLEN)

I'm not sure what they are waiting for at this point. Here's Kitco spot for the last year:
From Bloomberg Gadfly, Nov. 30:
The year's craziest industrial metal just got crazier.

Shanghai zinc futures hit their highest level in nine years on Tuesday, surging as much as 5.8 percent intraday. On Wednesday, after traders closing out positions pushed three-month contracts on the London Metal Exchange down 6.9 percent overnight, they posted a record drop, giving away all the gains made since last week.

The dog that hasn't barked here is Glencore Plc. The commodity trader is the king of zinc, accounting for more than 10 percent of global output in a good year. But it's been holding back since late last year, after the slump in prices reduced the profitability of its mines.

How Glencore chooses to dispose of its 500,000 metric tons of mothballed capacity -- equivalent to about 3.7 percent of global zinc output last year -- will be crucial in deciding whether the current run of high prices continues or sputters. If the company promises to continue its policy of watching and waiting in an investor update on Thursday, zinc bulls might do well to cut their positions.
Despite a bumper year for zinc in 2016, there's good reason to be cautious about the outlook. Much of the buoyant pricing has come as a result of withdrawn supply -- not just from Glencore's mines in Australia, Kazakhstan, and Peru, but also from sites like Vedanta Resources Plc's pits in India and Ireland.

Still Short
The world will still not have enough zinc next year, even if mine output rises sharply...MORE
"Goldman Overweights Commodities for First Time in Four Years"
...“The recent re-acceleration in global PMIs suggests commodity markets are entering a cyclically stronger environment,” Goldman analysts led by Jeff Currie wrote in a report e-mailed Monday. “Supply restrictions from policy actions should benefit oil, coking coal and nickel in the near term while economic reductions should boost natural gas and zinc.”...MORE
Just to hammer the point home, here's Kitco's 5-year chart:


Thursday, December 1, 2016

21st Century Headlines

I delude myself that I am reasonably up-to-speed on the zeitgeist and on technology but twenty or so times a day things are brought to my attention about which I was heretofore clueless.

Here's a headline from VentureBeat:
Bot-making service now supports Node.js
And all I can think of is a scene from Friends eighteen years ago:

Phoebe: They don't know we know they know we know. And Joey, you can't say anything.

Joey:      Couldn't if I wanted to.

And this one, also VentureBeat:
Super Evil Megacorp starts team-franchise program to energize Vainglory...
I would expect nothing less from SEMC.

According to CrunchBase Super Evil Megacorp has raised $42 million in three venture rounds.
I'd buy it just for the name. But wasn't invited.

Finally Quartz almost made the Questions America Wants Answered series with:
What Nike’s $720 self-lacing sneaker, releasing today, signals about Nike’s future
until I realized I didn't care what Nike's $720 self-lacing sneakers signaled about Nike's future.

And this happens every day.
I just nod my head and try to change the subject to something simpler.

If The U.S. Declares (economic) War On China

From FT Alphaville:

Of US-China trade war games
Well gentlemen, it seems that we have little option now but to declare war immediately.

We joke, we joke. A US-China trade war is obviously nobody’s base case. They all say so right up the top of notes, after all.

But considering base-cases haven’t been holding their own recently we should maybe take a look at what happens if a trade war does materialise. After all, lashing out internationally can make for good domestic politics, and China trade-war rhetoric was a recurring trope of the Trump presidential campaign, even if the real story is muddied by facts.
Here’s SocGen with a reminder of the president’s powers to act:
And here’s Deutsche with those facts about China’s real place in terms of trade with the US (our emphasis):
In fact, nearly 37 percent of China’s exports to the US in 2015 consisted of value-added imported from other countries (Figure 3). Redistributing the imported value-added to their original source countries gives a very different deficit decomposition picture for the US (Figure 4).1 While China still has the biggest “responsibility” for the US’s trade deficit, its share is only 16.4 percent. It is nowhere near the jaw-dropping 49.6 percent in Figure 1, which is about the combined share of the top 4 surplus partners (China, Japan, Germany and Korea) in the value-added based decomposition. Taiwan, previously not among the top 10 surplus partners in Figure 1, now ranks no. 6, accounting for 6.6 percent of the US’s trade deficit in 2015.
Thus a “trade war against China would be a war against all participants of the global supply chain, including some US companies.” So how would a President Trump actually fight one?

"Opendoor’s Home-Flipping Business Becomes the Latest Unicorn Startup"

From Bloomberg,
Silicon Valley's club of unicorn startups hasn't been growing as fast as it once was, and its newest member is unlike most of is venture-backed peers. Opendoor Labs Inc., a San Francisco startup that buys houses and then resells them, received a valuation of at least $1 billion after its latest funding round, said people familiar with the matter.

Opendoor said it raised $210 million, which it will use to fund expansion to 10 cities next year. The financing round was led by Norwest Venture Partners, with investments from New Enterprise Associates and others, OpenDoor said.

Opendoor buys and sells homes in the Dallas-Fort Worth area, Las Vegas and Phoenix, according to the company's website. The startup purchases houses with cash and then resells them at a higher price, sometimes after making minor repairs....MORE

A Short-Seller Talks Tesla (TSLA)

Our last serious post on Tesla (ex the mind control option and ex the Consumer Reports story) was November 18's "After the Merger Vote, What Now For Tesla? (TSLA)" we intro'd with:
One of the reasons we counsel discounting NVIDIA's autonomous vehicle opportunity is because their big tie-up with Tesla is dependent on Tesla being able to execute the master plan which in turn is dependent on TSLA coming up with somewhere between $3 and $12 billion dollars while the market is still accommodative....
I'm surprised we haven't heard anything from Mr. Musk on fundraising and with each passing day the uncertainty ratchets up a bit more until finally the longs can't t take the pressure anymore and crack psychologically and....pardon me, I started channeling a Palo Alto horror movie for some reason.

Ahem. The stock is down $8.15 (-4.30%) at $181.25.
And the company really should raise some money. Soon.

From ValueWalk, November 30:
Mark Spiegel’s Stanphyl Capital is having a killer year up close to 35% NET YTD – see below for an excerpt on Tesla Motors Inc (NASDAQ:TSLA) from their November shareholder letter.  But first… although he is known as Elon Musk’s number one enemy, Mr. Spiegel makes most of his money from killer small cap picks. His under the radar small caps which could pop just based on this piece (if we discussed it publicly) were profiled in ValueWalk’s 2nd edition of our quarterly premium newsletter. See some details followed by the Stanphyl section on Tesla Motors.

Stanphyl Capital Management LLC Stanphyl Capital GP, LLC Stanphyl Capital Partners LP
Friends and Fellow Investors:
For November 2016 the fund was up approximately 6.7% net of all fees and expenses. By way of comparison, the S&P 500 was up approximately 3.7% while the Russell 2000 was up approximately 11.2%. Year to date the fund is up approximately 34.7% net while the S&P 500 is up approximately 9.8% and the Russell 2000 is up approximately 18.0%. Since inception on June 1, 2011 the fund is up approximately 133.5% net while the S&P 500 is up approximately 84.0% and the Russell 2000 is up approximately 68.4%. (The S&P and Russell performances are based on their “Total Returns” indices which include reinvested dividends.) As always, investors will receive the fund’s exact performance figures from its outside administrator within a week or two.
And now for our individual stock positions…
We remain short shares of Tesla Motors Inc. (ticker: TSLA; November close: $189.40) as I continue to believe that it’s the market’s biggest single-company stock bubble. November was a good month for Tesla shorts– not just because the stock was down a bit but because shareholders approved the merger with the financial boat anchor known as SolarCity, complete with its nearly $2 billion a year in negative free [sic...probably "cash flow" omitted]
Regardless, this was a blatant bailout by Tesla shareholders of Musk’s 22 million otherwise soon-to-be worthless SolarCity shares, but as they voted to approve it and I’m glad they did, it’s a real kumbaya moment for all of us. Of course, the “bright shiny object” now for Tesla shareholders is the “$35,000 mass-market Model 3”; I thus urge you to read my new Seeking Alpha article as to why that will never happen, reinforced by a new Bloomberg article about how much money GM is losing on the Bolt despite having a battery cost equivalent to Tesla’s.
Meanwhile, following a leaked September memo from Musk urging employees to artificially inflate Q3 company results, in October Tesla did indeed manage to report a Q3 GAAP profit thanks primarily to the one-time sale of stockpiled California Zero Emission Vehicle (ZEV) credits, without which it would have booked a $117 million GAAP loss. Also helping to offset a loss were seemingly artificially low operating expenses (up just 7.4% vs. Q2 despite an 81% increase in revenue) and a substantial reduction in per-car warranty accrual despite the reliability issues detailed later in this letter. (Based on a back-of-the-envelope interpretation of the data in the 10-Q, I estimate the current warranty under-reserve to be nearly $2000 per car.) Tesla also proudly proclaimed itself “free cash flow positive,” a figure obtained only by massively increasing accounts payable (i.e., stiffing its vendors) and postponing approximately $500 million of capex from Q3 to Q4. Assuming Tesla spends the $1.1 billion in Q4 capex it projects and normalizes its accounts payable, I estimate that Q4 should be free cash flow negative to the tune of approximately $1.5 billion.

Although Musk proclaims otherwise, simple math thus implies that Tesla will soon need to do yet another massive capital raise to build the Gigafactory and get the Model 3 into production (not to mention to replenish the cash drain from the massive financial sinkhole created by buying SolarCity), even though it raised nearly $2 billion in 2014 explicitly to build the factory and $1.7 billion in May 2016 explicitly to put the Model 3 into production. As Tesla entered Q4 with around $3 billion in cash and on the Q3 conference call Musk said capex will be “higher in 2017 than 2016 for sure” and 2016 capex is projected to be $1.8 billion (including the aforementioned $1.1 billion scheduled for Q4), I’m guessing the company will be completely “cash free” by sometime in June and will thus look to raise money at least a quarter ahead of that. But wait a second! After the May 2016 raise didn’t Musk say he’d never need to raise capital again? Well actually he first said that in February… February 2012.

Tesla’s Q3 GAAP loss (excluding the non-repeatable ZEV credit sales) was $4710 per car sold, and contrary to the hopes and wishes of Teslarians and Teslemmings, Tesla would STILL be losing money even if it weren’t in “growth mode.” Q3 R&D spend was $8634 per car while R&D spend for slow-growing Porsche (Musk’s “profitability hero”) is approximately $10,800 per car. And while Tesla’s depreciation & amortization (a proxy for the “non-growth” component of its capex) was $11,299 per car while slowgrowth Porsche capex runs around $6100 per car, even if we were to adjust Tesla’s levels of both these metrics to that of Porsche, Tesla still would have lost $1677/car (GAAP, ex-ZEV sales) even if it weren’t “investing for growth.” Thus, Tesla’s (ex-ZEV credit sale) GAAP loss occurred because it’s a lousy business not because it’s a fast growing one.
Meanwhile, despite this nonsensically deceptive Musk comment from the October 26th earnings call…

One of the other things I’ve seen out there is that, like, somehow we achieved these numbers as a result of widespread discounting, that is absolutely false. There were a few discounts that – but they were few and far between and that has been absolutely shot down to zero.

…Tesla discounting continues unabated. Here’s a screenshot from Tesla’s website, taken while Musk was saying that there’s no discounting:...

...And here’s a link to a great web site showing just some of the additionally discounted inventory cars Tesla has available, many of which offer discounts of thousands of dollars on top of the $1000 referenced above and are brand new (with just 50 delivery miles) and were built expressly to be sold as discounted inventory. As of this morning- November 30th- I see discounts of as much as $8500 plus the $1000 referral discount. I hope for the sake of his astronauts that Musk’s definition of “zero” is more accurate for his Mars mission calculations than it is when he speaks about moving aluminum off overstuffed car lots.

Also in October Musk held a press conference introducing a new hardware suite for Tesla cars that he claimed would eventually provide fully autonomous coast-to-coast driving. However, according to industry experts it’s unsafe to even attempt to do that without lidar (laser scanners), which the new hardware doesn’t include. Of course, this isn’t stopping Tesla from trying to charge $3000 up front for “potential future capability” or from showing a strategically cut (and hence potentially highly misleading) video of those alleged “capabilities.” Musk also projected Tesla would attempt a hands-free coast-to-coast drive as soon as the end of 2017… perhaps he could first study the one Delphi did in early 2015.

Finally in October (in an effort to encourage “yes” votes for the SolarCity acquisition) Musk held a press conference to introduce a line of glass rooftop solar tiles not scheduled to go into production until summer 2017 and about which no specific details were released regarding price or efficiency. He also introduced a new Powerwall battery that offers approximately twice the storage of the old battery for the same price (and undoubtedly at little or no profit margin for Tesla), but despite that considerable improvement in the value quotient the unsubsidized economic case for the product is still nonexistent. (But then, the unsubsidized economic case for ANY of Musk’s products is nonexistent!)...MUCH MORE
See also:
MIT's Technology Review Takes A Whack At Tesla's Elon Musk (TSLA; SCTY)
Elon Musk Channels OK Go (TSLA)
Tesla, SolarCity Tumble Ahead Of New Merger Financials (TSLA; SCTY)
Today In Depreciation: Does Tesla Really Understand What It’s Buying in SolarCity? (TSLA; SCTY)
NVIDIA: Don't Buy the Stock For The Autonomous Car Stuff (or virtual reality) NVDA; TSLA; IBM
 NVDA's most headline-grabbing deal in autonomous vehicles is with Tesla about which we said:
Last week when Tesla formalized their relationship with NVIDIA, something we had already assumed into NVDA's stock price when TSLA parted ways with MobilEye, there was happiness among the longs that we didn't join...
There is a greater than trivial chance that Tesla won't be able to raise the money they need, variously estimated at 3, 6 and 12 billion dollars,* to achieve Elon's plan for world domination, or at least not at the time he will need it. If TSLA management is smart they would come to the market as soon as the SolarCity deal is done and grab, at minimum, the $3 billion while the window is open....
Tesla: "After All Is Said and Done, More Is Said Than Done" (TSLA)
JP Morgan Talks Tesla (TSLA)
Just A Reminder: "Musk Urges Tesla Workers to Cut Costs Ahead of Fundraising Round" (TSLA)
"Tesla Earnings Smash Expectations After Dramatic Change In Reporting Methodology" (TSLA)
Tesla Motors Plans to Change How it Reports its Earnings (TSLA)

That gets us to Oct. 26. For more, going back to the IPO, use the search blog box if one is so inclined. 
TSLA Tesla Motors, Inc. daily Stock Chart

Art In the 21st Century

From ArtNet:
Rachel Lee Hovnanian, FMLMBD Charging Station (2016).

That's in today's "Historical Women Dealers Lead the Way at X Contemporary", I think she nailed it.

"UberEATS Drastically Cut Wages for its Toronto Drivers"

From Fortune:

Delivery drivers and cyclists had no warning.

Delivery drivers and cyclists for UberEATS in Toronto woke up to discover that they were suddenly making less money.

The contracted workers received an email Tuesday morning that laid out the company’s new compensation policy, without prior warning that it would be implemented. One bike courier, Julia Pak, estimates that the new wages will reduce her income by 30-50%, The Star reports.

Before Nov. 29, delivery people made $6.50 for each order they picked up, plus $1.85 per kilometer traveled. This adds up if they collect several orders from one restaurant. But now, delivery people are making just $2.90 per pickup—a flat rate per restaurant versus getting paid per order. Their distance rate has also been reduced by 80 cents, while Uber’s cut of delivery fees remains 35%.

An Canada spokesperson told Fortune that this new policy comes with an added “boost” feature, a potential compensation bonus for workers in certain delivery zones. “Delivery fees are now made up of three parts—a pickup fee, a drop-off fee, and distance fees,” the spokesperson said. “Maximizing delivery partner earnings is a priority and we will continue to work to ensure a competitive income for all our partners.”...MORE

BOMBSHELL: Prince Was Secretly Married, Died To Protect CIA Connection !!!

From the New York Daily News:
A woman claims she married Prince before his death and is now hoping to cash in on his multi-million dollar estate.

Claire Elisabeth Elliott, 50, filed a request for control of Prince's estate, claiming she has a marriage certificate proving the two were married when the pop icon died of an accidental overdose on April 21.
In her filing, the California native is calling for the court to hand over control from Bremer Trust — which currently monitors the star's estate — as she is his "sole heir."

Elliot did not however include a copy of the marriage certificate in her court request and there is reportedly no evidence of one in Minnesota court, according to TMZ.

She wrote in the affidavit that she was secretly married to Prince in Las Vegas in 2002 by a rabbi named Ross Dreiblatt, who also allegedly drew up a “secret will” for the singer.

“Because the CIA and other agencies consider both documents to be Top Secret, Ross cannot publicly release either document without being properly served a subpoena,” the document reads.

On her Facebook page, Elliot posted a TMZ report about her marriage and responded to a comment from a user who questioned the pair's nuptials. "We didn't walk down the aisle, we just stood at the altar and got married," she wrote.

Her page also suggests that she lives in Georgia and is married to a man named Dean. On Monday, her hubby gifted her with a ring, which she wrote was her third one.

The woman — who specifically writes “I am not insane” in the filing — is no stranger to filings....

Scallywags and Vagabonds has more on Ms. Elliot/Nelson (pics) while the local CBS affiliate highlights the CIA angle:
...Elliott also filed documents to run for president last year.
Here are excerpts from her conversation with WCCO’s Edgar Linares:

Linares: You and Prince were married when?

Elliott: I believe the date was Jan. 14, 2002, when I was in Las Vegas. It was during the time when he was already married to his second wife. But when you’re in the CIA you can get married to more than one person at the same time. A lot of people don’t know that. And CIA law trumps American law, apparently.

Linares: So you were in the CIA? At what age were you in the CIA.

Elliott: I was born into the CIA. I am a victim of the CIA. My parents were involved in the CIA, and I became their victim....

Here's Sharae's cover of "Eye Wood Dye 4 U" with more clues. 

Some Bakken Shale Oil Production Costs Now On Par With Iran, Approaching Iraq's (and dropping)

From Reuters, Nov. 30:

Leaner and meaner: U.S. shale greater threat to OPEC after oil price war
NEW YORK/HOUSTON In a corner of the prolific Bakken shale play in North Dakota, oil companies can now pump crude at a price almost as low as that enjoyed by OPEC giants Iran and Iraq.
Until a few years ago it was unprofitable to produce oil from shale in the United States. The steep slide in costs could encourage more U.S. shale output if OPEC members cut supplies, undermining the producer group's ability to boost prices. OPEC ministers meet Wednesday to weigh output cuts to end a two-year glut that has pressured global oil prices.

In shale fields from Texas to North Dakota, production costs have roughly halved since 2014, when Saudi Arabia signaled an output free-for-all in an attempt to drive higher-cost shale producers out of the market.

Rather than killing the U.S. shale industry, the ensuing two-year price war made shale a stronger rival, even in the current low-price environment.

In Dunn County, North Dakota, there are around 2,000 square miles where the cost to produce Bakken shale is $15 a barrel and falling, according to Lynn Helms, head of the state's Department of Mineral Resources.

"The success in Dunn County has been fantastic," said Ron Ness, president of the North Dakota Petroleum Council.

Dunn County's cost is about the same as Iran's, and a little higher than Iraq's. Dunn County produces about 200,000 barrels of oil a day, about a fifth of daily production in the state.

It is North Dakota's sweet spot because it boasts the lowest costs in the state, yet improved technology and drilling techniques have boosted efficiency for the whole state and the entire U.S. oil industry....


OPEC Deal Sends Crude Curve Into (slight) Backwardation For First Time Since 2014

Front (Jan.) futures $51.63 +$2.19.

From ZeroHedge:
Following OPEC's agreement to cut prodiction for the first time in 8 years, front-end prices have spiked (above $50) but perhaps more notable is the unusual 'stability' in the crude curve around $54 from July 2017 to Nov 2019.
For the first time since October 2014, the belly of the crude curve is in backwardation (far-months cheaper than near-months).

WTI Dec. 2017 contract was trading at -$1.35 discount to Dec. 2018 at market open yesterday; has now flipped to premium, or backwardation..
Perhaps of note is that the backwardation in Oct 2014 seemed to catalyze an acceleration in the plunge in crude prices but for now we note that hopeful bulls eying a return to old norms may be disappointed as so much of the medium-term appears hedged and wedged.
Also at ZeroHedge:
Gartman: "Clearly We Were Wrong To Short Crude The Day Before The OPEC Meeting"

Turkey's Currency: A Trend Is Emerging

You have to follow the link for the full chart experience.

From FT Alphaville:
Poor Turkey, though maybe exports are looking up?

Choose your time frame for TRY/$…

Two months?,,,

"Nvidia Down 6% Post-Amazon AWS Show; Global Equities Sees GPU Payoff" (NVDA)

As noted in our last post on NVIDIA (it's been 10 days, possibly a record):
...I'm not saying Graphcore is the disruptor, just that it will be something like this. We'll be back with more next week but in the meantime the immediate threat is a bunch of fund managers looking for a bonus wanting to lock in the 280%+ that the stock has made this year and the public exhibiting the round number effect we mentioned back in 2007 as First Solar was on its way from $20 to $317:...
The folks holding NVIDIA right now have nervous hands after this year's very dramatic run and have multiple reasons to sell, all of which can be rationalized with any number of ex post reasons.
This is a dangerous time for the stock. $87.30 down $4.90 (-5.31%).

NVDA NVIDIA Corporation daily Stock Chart
From Barron's Tech Trader Daily:
Shares of graphics chip titan Nvidia (NVDA) are down $5.40, or almost 6%, at $86.80, which speculates is about negative sentiment following‘s (AMZN) conference in Las Vegas yesterday for its AWS cloud computing service, which suggested some competing chip use versus Nvidia’s GPUs, which have become more and more popular in cloud computing.

Amazon mentioned FPGAs for its cloud computing services, such as “machine learning,” which could tend to suggest there might be less reliance on Nvidia’s graphics chips. Amazon like many other firms has made extensive use of GPUs in cloud.

But in a note from Global Equities Research’s Trip Chowdhry today, reviewing day two of Amazon’s conference, Chowdhry actually trumpets the many ways in which Nvidia “wins” regardless of how Amazon’s services are architected:
WHO IS THE WINNER: Nvidia – NVDA wins irrespective of which framework wins All the above frameworks – Watson, CNTK, TensorFlow, Torch, MXNet are optimized for NVDA GPU’s using NVDA CUDA libraries...
Here are the rest of our November posts, for the prior year-and-a-half use the 'search blog' box if interested:

"The Fuzzy Future of Virtual Reality and Augmented Reality" (NVDA; FB)
NVIDIA Builds Its Very Own Supercomputer, Enters The Top500 List At #28 (NVDA)
NVIDIA: Don't Buy the Stock For The Autonomous Car Stuff (or virtual reality) NVDA; TSLA; IBM
"Nvidia Drops 4% Even as Needham Ups to Buy" (NVDA)
The stock closed down almost 5% at $83.64 -4.33 (-4.92%). After Friday's 30% upmove we were bracing for as much as a 10% drop out of the chute. For folks new to this type of investing, high-tech at high multiples, the swings can be almost terrifying, especially now that it is not 'undiscovered'.
C'est la vie, c'est la guerre, c'est la pomme de terre.  
A Brief Interview With NVIDIA's CEO and Analysts React (NVDA)
NVIDIA: Jeffries, RBC Capital Markets; MKM Raise Price Targets, Stock Soars 22% (NVDA)
NVIDIA Beats On Top Line; Beats On Bottom Line; Raises Guidance, Stock Jumps 13% (NVDA)
NVIDIA: Ahead of Today's Earnings Report There Sure Is A Lot Of Happy Talk (NVDA)
Attentive reader may have noticed we haven't posted on the company in the run-up to today's numbers. Instead we end up in the very unfamiliar role of prude saying stuff such as this from October 25:
We continue to bet on one of the class acts of Silicon valley but investors have to know what  they have here and unless they are willing to ride a 20% down move to get to greater glory profits they should maybe go buy some T-bills...
And that's where we're at

Wednesday, November 30, 2016

Questions America Wants Answered: "What does a £15,000 whisky taste like?"

From the EveningStandard:

Ashley Coates asks some of the lucky few that have tried the 1972 release from Balvenie

 The Balvenie DCS Compendium Chapter II
They stare down at you from glass cabinets in London’s high-end retailers, seemingly untouchable. But what does a whisky in this category actually taste like, and how does it get to be so expensive?
To answer these questions, I looked to some of the experts in the business, all of which have been given the chance to sample the recently released 1972 Balvenie from the DCS Compendium Chapter II. 

Balvenie does not specialise in ultra-rare whiskies. The Speyside distillery offers some comparatively reasonably priced and popular variations, the 12-Year Doublewood, the 14-year Caribbean Cask and the 17-Year Doublewood being amongst the best known and most appreciated.

But this year was a special one for Balvenie. It’s the 53rd year in which its Malt Master, David Charles Stewart MBE, has been creating world-famous whiskies for the firm. Having been appointed Master Distiller to Balvenie back in 1974, he’s the longest serving master distiller in the whisky industry. The DCS Compendium has been made to honour 50 years in the business and is an “unconventional handover note” from David, who said at the time of the release: “I had to leaf through ledgers, search computer records, and had to hop, quite literally, barrel over barrel to seek them out in the various warehouses”. There will be five 'chapters' in the compendium, each consisting of five rare whiskies, released over five years....MUCH MORE

Kremlin Unsure How to Take Erdogan's Vow to Topple Assad

The precedent is already established, the one used in "Reply of the Zaporozhian Cossacks", see below.

The problem with what Erdo─čan is doing is it risks drawing NATO into a war with Syria and their ally Russia.
From al-Monitor:
A top Russian diplomat rebuked Turkey’s president over his comments on Syria today, saying they contradict international agreements on the war-wracked country. Russian Deputy Foreign Minister Mikhail Bogdanov told Russian news agencies Nov. 30 that his government was puzzled by Recep Tayyip Erdogan’s assertion a day earlier that Turkey was in Syria for no reason other than to topple President Bashar al-Assad. "We are there to bring justice. We are there to end the rule of the cruel Assad, who has been spreading state terror," Erdogan said.

His words flew in the face of Turkey’s earlier claims that it had sent its troops into northern Syria to battle the Islamic State and the Syrian Kurdish militia known as the People’s Protection Units: It's against all international agreements that Turkey is party to “if Erdogan plans to wage war,” on Assad, Bogdanov said.

In separate remarks, Kremlin spokesman Dmitry Peskov told reporters, "It is a very serious statement and one which differs from previous ones and with our understanding of the situation. We hope that our Turkish partners will provide us with some kind of explanation about this."
There has not been any yet.

Russia and Iran are the Syrian regime's chief allies in the war against opposition rebels who are, in turn, supported by Turkey, various Gulf states and in part by the CIA. But in recent months Turkey has signaled willingness to rein in the one group that poses the biggest threat to Assad’s rule — the al-Qaeda-linked Jabhat al-Nusra, which now calls itself Jabhat Fatah al-Sham. The shift followed a frenzied campaign by Turkey to woo back Russia after the pair fell out over Turkey’s downing of a Russian jet in November last year.

Analysts reckon Erdogan’s latest spate of hawkishness has more to do with placating his own Islamist base than with yet another U-turn in Turkey’s thus far disastrous Syria policy....MORE
And back to the Cossacks. A couple weeks ago we posted "Little Has Changed Between Turkey, Russia Despite Reconciliation" with this introduction:
Whenever I think about Turkish-Russian relations I think of this painting:

That's "Reply of the Zaporozhian Cossacks" by Repin, hanging in the State Russian Museum, St. Petersburg.

As the story goes, in 1676 the Turkish Sultan, despite being beaten by the Cossacks when he tried to invade what is now southern Ukraine, demanded these guys surrender and submit to Turkish rule.

As can be seen, the Cossacks thought this was the funniest thing they had ever heard and wrote a letter in response.
A very profane, very defiant, very vulgar, very contemptuous letter.

These old boys just cracked themselves up with their letter.
And that's what I think of when I think of Russians and Turks.

"'Sheer number of unknowns' deters private equity from farming"
From Agrimoney:
Private equity firms have largely stayed away from agriculture due to the risks the sector presents, said David Gray, partner at Altima Partners, an investment manager.
"PE firms don't like commodity risk," said Mr Gray.
Such investors had tended to shy away from the production side of the agriculture sector and focus instead on "value add" – that is, the industries processing raw farm commodities into higher value products.
'Number of unknowns'
Besides an apparent lack of liquidity and visibility of fund drivers, uncertainty surrounding the sector kept firms away.
"There is too much uncertainty involving weather and crop," said Mr Gray at the AgriRisk Forum in London. "They don't know what the weather is going to be like or what the production figures will be."...MORE
A couple years ago one private equity fund, ACM was raising $250 million but I don't know if it has deployed all the money. The last time I looked they were growing organic blueberries and hazelnuts but on the one hand if you put that much loot into blueberries you'd probably have antitrust problems and on the other, the international hazelnut cartel is facing declines in the Gin Gimlet end-market and Nutella is getting vertically integrated in their sourcing.
As usual, apologies to the Grant Wood Estate and the Art Institute of Chicago for the image at the top of the post.  

OPEC Deal Agreement Table

Discerning reader may have noticed a lack of oil commentary the last week or so.
Our thinking was pretty simple (simplistic?), how the heck would our readers trade this mess:

When confronted with such things we default to Lao Tzu on Derivatives:

Those who know, do not speak.
Those who speak, do not know.
-Ch. 56, Tao Te Ching

Anyway....until the Dec. 9 OPEC/NOPEC meeting we're going to keep most of our thinking to ourselves although I will point out that WTI's failure to clear $50 is telling, $49.21 last.

For now the two most timely and topical commentators are probably the FT's Neil Hume and Reuters' John Kemp, from whom we lift the table:

"Can Uber Ever Deliver? Part One – Understanding Uber’s Bleak Operating Economics"

As mentioned in the post immediately below, Naked Capitalism is doing a fundraiser. This is part of the effort.
From Naked Capitalism:
This is Naked Capitalism’s special fundraiser, to fight a McCarthtyite attack against this site and 200 others by funding legal expenses and other site support. For more background on how the Washington Post smeared Naked Capitalism along with other established, well-regarded independent news sites, and why this is such a dangerous development, see this article by Ben Norton and Greenwald and this piece by Matt Taibbi. Our post gives more detail on how we plan to fight back. 23 donors have already supported this campaign. Please join us and participate via our Tip Jar, which shows how to give via check, credit card, debit card, or PayPal.

Yves here. By virtue of steamrolling local taxi operations in cities all over the world, combined with cultivating cheerleaders in the business press and among Silicon Valley libertarians, Uber has managed to create an image of inevitability and invincibility. How much is hype and how much is real?

As transportation industry expert Hubert Horan will demonstrate in his four-part series, Uber has greatly oversold its case. There are no grounds for believing that Uber will ever be profitable, let alone justify its lofty valuation, absent perhaps the widespread implementation of driverless cars. Lambert has started digging into that issue, and his posts on that topic have consistently found that the technology would be vastly more difficult to develop and implement that its boosters acknowledge, would require substantial upgrading in roads, may never be viable in adverse weather conditions (snow and rain) and is least likely to be implemented in cities, which present far more daunting design demands that long-distance transport on highways.

Tellingly, earlier this month, Bloomberg reported that JP Morgan and Deutsche Bank turned down the “opportunity” to sell Uber shares to high-net-worth individuals. The reason? The taxi ride company provided 290 pages of verbiage, but would not provide its net income or even annual revenues.

By Hubert Horan, who has 40 years of experience in the management and regulation of transportation companies (primarily airlines). Horan has no financial links with any urban car service industry competitors, investors or regulators, or any firms that work on behalf of industry participants.

Uber is currently the most highly valued private company in the world. Its primarily Silicon Valley-based investors have a achieved a venture capital valuation of $69 billion based on direct investment of over $13 billion. Uber hopes to earn billions in returns for those investors out of an urban car service industry that historically had razor-thin margins producing a commodity product. Although the industry has been competitively fragmented and structurally stable for over a century, Uber has been aggressively pursuing global industry dominance, in the belief that the industry has been radically transformed into a “winner-take-all” market.

This is the first of a series of articles addressing the question of whether Uber’s pursuit of global industry dominance would actually improve the efficiency of the urban car service industry and improve overall economic welfare.

For Uber (or any other radical industry restructuring) to be welfare enhancing, it would have to clearly demonstrate:
The ability to earn sustainable profits in competitive markets large enough to provide attractive returns on its invested capital
The ability to provide service at significantly lower cost, or the ability to produce much higher quality service at similar costs
That it has created new sources of sustainable competitive advantages through major product redesigns and technology/process innovations that incumbent producers could not readily match, and
Evidence that the newly-dominant company will have strong incentive to pass on a significant share of those efficiency gains to consumers.
Unlike most startups, Uber did not enter the industry in pursuit of a significant market share, but was explicitly working to drive incumbents out of business and achieve global industry dominance. Uber’s huge valuation was always predicated on the dramatic growth towards global dominance. Thus if Uber’s valuation and industry dominance were to be welfare enhancing, Uber’s efficiency and competitive advantages would need to be overwhelming, and there would need to be clear evidence of Uber’s ability to generate large profits and consumer welfare benefits out of these advantages.

While most media coverage focused on isolated Uber product attributes, or its corporate style and image, this series will focus on the overall economics of Uber, using the approaches that outsiders examining industry competitive dynamics or investment opportunities typically would. This first article will present evidence on Uber’s profitability, while subsequent pieces will present evidence about cost efficiency, competitive advantage and the other issues critical to the larger economic welfare question.

Uber Has Operating Losses of $2 Billion a Year, More Than Any Startup in History
Published financial data shows that Uber is losing more money than any startup in history and that its ability to capture customers and drivers from incumbent operators is entirely due to $2 billion in annual investor subsidies. The vast majority of media coverage presumes Uber is following the path of prominent digitally-based startups whose large initial losses transformed into strong profits within a few years.

This presumption is contradicted by Uber’s actual financial results, which show no meaningful margin improvement through 2015 while the limited margin improvements achieved in 2016 can be entirely explained by Uber-imposed cutbacks to driver compensation. It is also contradicted by the fact that Uber lacks the major scale and network economies that allowed digitally-based startups to achieve rapid margin improvement.

As a private company, Uber is not required to publish financial statements, and financial statements disseminated privately are not required to be audited in accordance with generally accepted accounting principles (GAAP) or satisfy the SEC’s reporting standards for public companies.

The financial tables below are based on private financial statements that Uber shared with investors that were published in the financial press on three separate occasions. The first set included data for 2012, 2013 and the first half of 2014, although only EBITAR (before interest, taxes, depreciation and amortization) contribution was shown, not the true (GAAP) profit that publically traded companies report.[1] The second set included tables of GAAP profit data for full year 2014 and the first half of 2015;[2] the third set included summary EBITAR contribution data for the first half of 2016.[3] There has been no public report of results for the fourth quarter of 2015.

Exhibit 1 summarizes data from 2013 through the first half of 2015. Drivers retained 83% of passenger payments (fares plus tips) which must cover the cost of vehicle ownership, insurance and maintenance, fuel, credit card and license fees as well as health insurance and take home pay; the balance is Uber’s total revenue. Exhibit 2 shows the GAAP results for the full year ending September 2015 based on the published numbers and an estimated quarterly split of published 2nd half 2014 results. Exhibit 3 compares first half 2016 results to 2014-15 results. There is no simple relationship between EBITAR contribution and GAAP profitability and even publically traded companies have wide leeway as to what expenses can be excluded from interim contribution measures such as EBITAR.
As shown in Exhibit 2, for the year ending September 2015, Uber had GAAP losses of $2 billion on revenue of $1.4 billion, a negative 143% profit margin. Thus Uber’s current operations depend on $2 billion in subsidies, funded out of the $13 billion in cash its investors have provided.
Uber passengers were paying only 41% of the actual cost of their trips; Uber was using these massive subsidies to undercut the fares and provide more capacity than the competitors who had to cover 100% of their costs out of passenger fares.

Many other tech startups lost money as they pursued growth and market share, but losses of this magnitude are unprecedented; in its worst-ever four quarters, in 2000, Amazon had a negative 50% margin, losing $1.4 billion on $2.8 billion in revenue, and the company responded by firing more than 15 percent of its workforce.[4] 2015 was Uber’s fifth year of operations; at that point in its history Facebook was achieving 25% profit margins.[5]

No Evidence of the Rapid Margin Improvement That Drove Other Tech Startups to Profitability
There is no evidence that Uber’s rapid growth is driving the rapid margin improvements achieved by other prominent tech startups as they “grew into profitability.”...