Archive for August 2018

Here is a Fun Challenge: Be Skeptical of Statistics Even When They Support Your Point of View

I sometimes wonder if the media and the punditocracy have any ability any more to reality-check statistics.  Two examples:

One

Trump supporters were running around in circles patting themselves on the back with this story:

African American business owners are on the rise. According to the Minority 2018 Small Business Trends survey, the number of black-owned small businesses in the U.S. increased by a staggering 400% in a year-over-year time period from 2017 to 2018.

I call bullsh*t on this.  There is no WAY that the number of black-owned businesses increase by a factor of 5** in just one year.  There are millions of black-owned small businesses in this country and there is no way this quintupled** in a year.   It does not pass any kind of smell test.   It is clearly some sort of measurement error, either a small sample size for a survey or a change in data source and definitions from one year to another.  I could go investigate the study and try to figure out the cause but I do not even need to bother because economic and demographic data simply do not change at this pace in one year.

Two

The other example I have is this absurd figure:

A recent survey conducted by OVW and the Bureau of Justice Statistics found that an average of one in four undergraduate females experience sexual assault by the time they finish college.

Here is the deal with this stat:  no one actually really believes it.  Why do I say this with confidence?  Because parents still send their daughters to college -- in fact they fight and scrap and invest huge amounts of time and money to send their daughter to college.  If they really believed their little darling had a 1 in 4 chance of being sexually assaulted, they would never do so.

Here is a point of comparison:  The Japanese brutal occupation of Nanjing, China is commonly known as the "Rape of Nanjing."  It is called this in part because so many local women were raped.  The numbers are fought over by historians, but the best estimate is that 20,000 of the approximately 100,000 women who were in Nanjing at the time were raped by Japanese soldiers, or about one in five.  This means that if the one in four number is correct, then colleges are more dangerous for women than being in Nanjing during the Japanese occupation.  Now, I would venture to guess that if I tried to stuff you daughter into a time machine and send her back to Nanjing on December 13, 1937 you would probably fight me to the death to prevent it.  But parents don't act anything like this vis a vis going to college, ergo no one believes this figure.  So why does everyone keep using it like it is accurate?

** I had put quadrupled but my son just called and reminded me that a 400% increase means quintupled.  Thanks, Nic.  Though I will say there is a good chance the source incorrectly used 400% to mean quadrupled, so I can't rule that out either.

The Good Intentions Generation

This seems to be a generation in which good intentions are enough.  Actually, I am not sure this is exactly right, let me try again.  This seems to be a generation in which the signaling of good intentions is enough.


Socialism will work because we have good intentions for it.  Trade wars will work because we have good intentions.  Tesla is valuable because it has good intentions.

Democratic socialism supporters don't even know what socialism is.  Trump supporters don't understand squat about economics but just feel that Trump genuinely wants to help them.  Tesla bulls don't even try to look at a balance sheet but just really, really love the idea of Elon Musk being a real-life but progressive Tony Stark.  Not sure where I am going with this, but just frustrated this morning trying to talk policy in a world of virtue-signalling.  In the last few elections I have been presented with discouraging but predictable choices.  Now I am presented with a choice between two parties that have both lost their minds.

What Socialists (and Most Other People) Don't Understand About The Oil Industry

This same failure has happened over and over, at one time or another in Russia and Mexico and now in Venezuela.  Some tried to make it happen in the 1970's in the US, and Elizabeth Warren would still like to try, I bet.  Socialists take over the oil industry and revel in the first months about all they money they are able to divert to "social" expenditures.  Then, in a few year, it all comes crashing down.  This tweet from Michael Moore five years ago gives you a good idea of the thinking.

Socialists have always seen production and wealth creation as some sort of magic, a fountain in the desert where piggy rich people push to the front and take more than their fair share.  Oil looks to them as the ultimate example of this -- wealth just flows out of the ground and evil rich people at Exxon grab it all for themselves.

But in fact, oil is just the opposite of the magic fountain.  It takes a huge quantity of money and brains to get even one drop of it in usable form to your car.  Imagine trying to figure out where even to look for oil when it is hiding far under ground.  Or having to poke holes a mile into the ground from structures standing in 1000 foot deep water in the Gulf of Mexico.  And then transporting the oil hundreds or thousands of miles by pipeline and ship and train and truck.  And then carefully refining the oil almost molecule by molecule in multi-billion dollar facilities.  And then getting the usable parts to the right people, including distribution outlets for you and I on almost every corner of town.

Right now gasoline in Phoenix goes for about $2.85 a gallon, which is about $2.40 before taxes.  This is 60 cents a quart, which compares to the retail price of a bottle of water of about $2.00-$2.50 a quart.  It's a freaking miracle of modernity that you can fill your car this inexpensively.

Anyway, it turns out that oil is the ultimate "you have to spend money to make money" kind of business.  And once you spend all that money, you investment immediately starts dying.  Oil companies have to completely rebuild retail gas stations every 20-30 years.  Refineries have to be constantly updated with really expensive improvements to take advantage of new technologies, to adjust to changing markets and regulations, and to handle different types of crude oil.  And then there is oil production.  Drill a well today and the moment you open it up, the production starts to fall off.  The flow will drop, the percentage of water might increase-- a million things can happen and all of them bad.  To keep wells flowing companies constantly have to reinvest their profits in reworking the wells (fracking and such) and adding enhanced recovery systems.  As fields deplete, new wells have to be drilled in new locations or at new depths, or else whole new fields have to be developed to replace them.

The "greedy and short-term-focused" oil companies reinvest much of their earnings to make sure the supply of oil is sustained.  The "enlightened" socialists harvest all the cash they can and hand it to their cronies, allowing the production assets to fall apart and, eventually, their economy to collapse.

I Spend a Lot Of Time Here Skewering Goofy Technologies, But... I Love This One

As a train enthusiast, I have to admit this sings to me.  I give them double points for being honest that their technology is not yet economic

The wind doesn't always blow, the sun doesn't always shine. So utilities are in search of ways to store surplus energy when they've got it, so they can distribute it later, when it's needed.

The most "duh" approach to energy storage is very big batteries like the ones Elon Musk peddles, which are poised to become a lot cheaper in the next five years. Pumped hydroelectric facilities are another option. Or you can move compressed air around underground caves. But none of these options has emerged as the best way to fix the grid.

Then there's rail energy storage, which is about to get its grand debut. In April, the Bureau of Land Management approved an ARES—that's Advanced Rail Energy Storage—project, conceived by a Santa Barbara-based energy startup called, well, ARES. By 2019, ARES operations head Francesca Cava says, the facility will occupy 106 acres in the excellently-named town of Pahrump, Nevada. By running a train up and down a hill, ARES can help utilities add to and subtract from the grid as needed.

It's a wonderfully simple idea, a 19th century solution for a 21st century problem, with some help from the abundant natural resource that is gravity. When the local utility's got surplus electricity, it powers up the electric motors that drag 9,600 tons of rock- and concrete-filled railcars up a 2,000-foot hill. When it's got a deficit, 9,600 tons of railcar rumble down, and those motors generate electricity via regenerative braking—the same way your Prius does. Effectively, all the energy used to move the train up the hill is stored, and recouped when it comes back down.

 

CNN, Buzzfeed, NYT, WaPo, AP, NBC, And Politico Attempting to Doxx Manafort Jurors

Just one day after their coordinated virtue signaling about their important role in maintaining a civil society**, a coalition of media companies have filed a motion (pdf) seeking the names and addresses of the jurors in the Manafort trial.  I am a huge supporter of sunlight and disclosure in  government, and perhaps there is a precedent for this, but it seems like a terrible idea.  I have served on two criminal juries in my lifetime and I can guarantee you I would have resisted participation had I known that my name and home address would be released to the public in association with the trial verdict.

CNN in particular has some history in misusing doxxing.  A year or so ago they threatened a Reddit user with doxxing if he didn't stop posting a meme critical of CNN.  Given that probably 95% of the employees of this media coalition probably want to see Manafort convicted, there is real reason for concern how this information might be used.

In FOIA rules, the decisions to release a particular piece of information to one petitioner is a decision to release it to everyone,  I am not sure if similar rules would apply here.  Kind of hoping that Ken White at Popehat chimes in on this.

 

** A conclusion I am sympathetic to, though I think the media undercuts their argument a bit by acting as thin-skinned and as childish at times as President Trump does.

Update:  Judge denies motion.  Good.

The Meteor Extinction Debate Looks A LOT Like the Climate Debate

This article about a skeptic of the dominant Alvarez meteor-extinction debate is quite interesting and worth a read.  Gerta Keller has had quite an interesting life.  But I will say I found it particularly fascinating comparing details here to the climate debate.  Here are a few example quotes that will seem very familiar to those who have watched the back and forth over global warming, particularly from the skeptic side:

Keller’s resistance has put her at the core of one of the most rancorous and longest-running controversies in science. “It’s like the Thirty Years’ War,” says Kirk Johnson, the director of the Smithsonian’s National Museum of Natural History. Impacters’ case-closed confidence belies decades of vicious infighting, with the two sides trading accusations of slander, sabotage, threats, discrimination, spurious data, and attempts to torpedo careers. “I’ve never come across anything that’s been so acrimonious,” Kerr says. “I’m almost speechless because of it.” Keller keeps a running list of insults that other scientists have hurled at her, either behind her back or to her face. She says she’s been called a “bitch” and “the most dangerous woman in the world,” who “should be stoned and burned at the stake.”

Nobel prize winner Alvarez sounds a bit like Michael Mann:

Ad hominem attacks had by then long characterized the mass-extinction controversy, which came to be known as the “dinosaur wars.” Alvarez had set the tone. His numerous scientific exploits—winning the Nobel Prize in Physics, flying alongside the crew that bombed Hiroshima, “X-raying” Egypt’s pyramids in search of secret chambers—had earned him renown far beyond academia, and he had wielded his star power to mock, malign, and discredit opponents who dared to contradict him. In The New York Times, Alvarez branded one skeptic “not a very good scientist,” chided dissenters for “publishing scientific nonsense,” suggested ignoring another scientist’s work because of his “general incompetence,” and wrote off the entire discipline of paleontology when specialists protested that the fossil record contradicted his theory. “I don’t like to say bad things about paleontologists, but they’re really not very good scientists,” Alvarez told TheTimes. “They’re more like stamp collectors.”

This sounds familiar, dueling battles between models and observations:

That the dinosaur wars drew in scientists from multiple disciplines only added to the bad blood. Paleontologists resented arriviste physicists, like Alvarez, for ignoring their data; physicists figured the stamp collectors were just bitter because they hadn’t cracked the mystery themselves. Differing methods and standards of proof failed to translate across fields. Where the physicists trusted models, for example, geologists demanded observations from fieldwork.

There is pal review

he said impacters had warned some of her collaborators not to work with her, even contacting their supervisors in order to pressure them to sever ties. (Thierry Adatte and Wolfgang Stinnesbeck, who have worked with Keller for years, confirmed this.) Keller listed numerous research papers whose early drafts had been rejected, she felt, because pro-impact peer reviewers “just come out and regurgitate their hatred.”

And charges that key data is not being shared to avoid it falling in the hands of skeptics

She suspected repeated attempts to deny her access to valuable samples extracted from the Chicxulub crater, such as in 2002, when the journal Nature reported on accusations that Jan Smit had seized control of a crucial piece of rock—drilled at great expense—and purposefully delayed its distribution to other scientists, a claim Smit called “ridiculous.” (Keller told me the sample went missing and was eventually found in Smit’s duffel bag; Smit says this is “pure fantasy.”)

Leading to a familiar discussion of scientific consensus

Keller and others accuse the impacters of trying to squash deliberation before alternate ideas can get a fair hearing. Though geologists had bickered for 60 years before reaching a consensus on continental drift, Alvarez declared the extinction debate over and done within two years. “That the asteroid hit, and that the impact triggered the extinction of much of the life of the sea … are no longer debatable points,” he said in a 1982 lecture.....

All the squabbling raises a question: How will the public know when scientists have determined which scenario is right? It is tempting, but unreliable, to trust what appears to be the majority opinion. Forty-one co-authors signed on to a 2010 Science paper asserting that Chicxulub was, after all the evidence had been evaluated, conclusively to blame for the dinosaurs’ death. Case closed, again. Although some might consider this proof of consensus, dozens of geologists, paleontologists, and biologists wrote in to the journal contesting the paper’s methods and conclusions. Science is not done by vote.

Hunting Through The Jungle to Eliminate the Last Surviving Soldier in the Culture War

Those of you as old as I am may remember in the 1970's when a few last surviving Japanese soldiers from WWII were discovered or coaxed to surrender after hiding for decades in some Pacific jungle.  No one was looking to punish these guys -- the war was won and over -- we were just trying to get them to come out and try to live a normal life.

I am reminded of these stories upon reading that Colorado is yet again going after the same baker for not baking someone a cake:

On the same day the high court agreed to review the Masterpiece case, an attorney named Autumn Scardina called Phillips’ shop and asked him to create a cake celebrating a sex transition. The caller asked that the cake include a blue exterior and a pink interior, a reflection of Scardina’s transgender identity. Phillips declined to create the cake, given his religious conviction that sex is immutable, while offering to sell the caller other pre-made baked goods.

In the months that followed, the bakery received requests for cakes featuring marijuana use, sexually explicit messages, and Satanic symbols. One solicitation submitted by email asked the cake shop to create a three-tiered white cake depicting Satan licking a functional 9 inch dildo. Phillips believes Scardina made all these requests.

Scardina filed a complaint with the civil rights commission, alleging discrimination on the basis of gender identity. The matter was held in abeyance while the Supreme Court adjudicated the Masterpiece case.

I have supported gay rights for as long as I can remember and briefly ran an Arizona campaign to legalize gay marriage.  But this looks to me like sending an entire army into the jungle to try to hunt down and kill that last Japanese soldier.  Isn't it enough that we have complete legal tolerance of homosexuality, de facto tolerance by the majority of Americans, and commercial tolerance in that 99+% of all businesses gratefully accept business from gays?  There can't be that many businesses denying accommodation to gays and trans-gendered when they have to keep harping on the same one example of non-conformity.  One of the features Hannah Arendt used to distinguish totalitarianism from run-of-the-mill authoritarianism was that in the latter, authorities need everyone to act in accordance with their wishes, in totalitarian governments they require people to believe in accordance with their wishes.  This need to seek out and harshly punish tiny infractions against social justice strikes me as totalitarian.

As an aside, I would challenge anyone to say that there is no message they would refuse to put on a cake.  I can think of a number I would say no to, starting with this one.

Mandated accommodation laws are a tough thing.  Libertarians tend to be suspicious of them because they tend to tread on several first amendment rights (speech, association).  But I could envision cases where I would support them, for example in the 1960's South during the dismantling of Jim Crow.  I really do not think we are there for gay wedding cakes.

 

For the Music Lover, See the Muscle Shoals Documentary

Aretha Franklin has passed away, and in his obituary for her, Scott Johnson mentions her early recordings at the Muscle Shoals studio in Alabama.  I remember seeing one of these Franklin studio performances in the documentary Muscle Shoals.  Her performance was staggering in its power.  I am not sure I have seen anything like it.  The entire documentary is recommended.

Tesla: With the First Domino Tipped Over, It is Just Physics Now

You may not see much Tesla coverage here for a while, despite a lot of breaking news.  Here is why:

The dominoes are all lined up, and that was an interesting story (the dominoes include:  Tesla's poor management of a good product, its lack of adult supervision, its repeated failure to meet targets, its utter contempt for being held accountable to targets, its paranoid worldview, its past near-corrupt actions like the insider SolarCity purchase, Musk's irrational hatred of shorts, its running out of cash without any plan for a capital raise, the fanboys who would eat any dog food Musk served up, etc.)

The first domino has been tipped over (Musk's outright lie that he had funding secured for a $420 buyout when he had not even talked to bankers or his board yet, just to tweak the shorts for a few hours in one day).

Now, I am not sure that I find further falling dominoes that interesting -- after all, it is just inevitable physics at this point.

Note:  The crash is likely to be much slower than at Enron.  Once confidence failed in Enron, the crash came almost at once because Enron was like a large bank that was investing long and borrowing short.  Once the short-term borrowing window was closed for them, it was over.   Tesla can likely make it 6 months before they start scraping bottom and/or their debt covenants.

Update:  For the Tesla fanboys who seem super-excited about the loss of liquidity moving to a private company, here is what being a minor shareholder in a private company is like:

Three of Tinder's co-founders and several other current and former senior executives are suing the dating company's parent organizations, Match Group and IAC. According to a complaint published online, the lawsuit seeks billions of dollars in damages for allegedly manipulating financial information in order to reduce Tinder's valuation and illegally take away employees' stock options.

The complaint explains that Tinder was supposed to be valued in 2017, 2018, 2020 and 2021; On those days, employees should have been able to exercise their stock options. Instead, the lawsuit alleges that parent company IAC/Match Group inaccurately lowballed Tinder's valuation in July 2017 at $3 billion, the same as it did two years ago despite the dating app's substantial growth. Then, the parent company secretly merged Tinder into Match Group, which meant employees earned far less in stock options. Then, IAC threatened to terminate anyone who revealed how much the company was actually worth, the lawsuit claims.

Tesla Predictions Secured

I had dinner last night with my old college roommate Brink Lindsey and he even sort of rolled his eyes about my recent Tesla obsession, so I really really will try to make this the last post for a while.  However, I have to count coup on a few accurate predictions I made last week here and here.

First, I said, in reference to how Musk can bail himself out of his "funding secured" tweet when it has become clear this is not the case:

So what can Musk do?  Well, the first defense might be to release a statement like "when I said funding secured, I was referring to recent conversations with ______ [fill in blank, maybe with Saudis or the Chinese, call them X] and they told me that if we ever were looking for funds they would have my back."  This is probably the best he could do, and Tesla would try to chalk it up to naivete of Mr. Musk to accept barroom conversation as a firm commitment.  Naivite, but not fraud.   I don't have any experience with the Feds on this kind of thing but my guess is that the SEC would expect that the CEO of a $50 billion public company should know the rules and legally wasn't allowed to be naive, but who knows, the defense worked for Hillary Clinton with her email servers.

Today Musk writes:

Recently, after the Saudi fund bought almost 5% of Tesla stock through the public markets, they reached out to ask for another meeting. That meeting took place on July 31st. During the meeting, the Managing Director of the fund expressed regret that I had not moved forward previously on a going private transaction with them, and he strongly expressed his support for funding a going private transaction for Tesla at this time. I understood from him that no other decision makers were needed and that they were eager to proceed....

I left the July 31st meeting with no question that a deal with the Saudi sovereign fund could be closed, and that it was just a matter of getting the process moving. This is why I referred to “funding secured” in the August 7th announcement.

Of course the Feds probably expect "funding secured" to mean a signed term sheet (which does not exist) accompanied by an 8-K (which STILL has not been issued).  I then said in my prediction:

But this defense is MUCH MUCH better if, in the next day or so, Tesla can announce a deal with X on paper with signatures.  Then Musk can use the same defense as above but it has much more weight because he can say, see, they promised funding and I believed them when they said they had my back and here they have delivered.

And today we learn:

But was the funding really secured? Apparently not, because in the very next paragraph Musk writes that "following the August 7th announcement, I have continued to communicate with the Managing Director of the Saudi fund. He has expressed support for proceeding subject to financial and other due diligence and their internal review process for obtaining approvals. He has also asked for additional details on how the company would be taken private, including any required percentages and any regulatory requirements."

Hmmm.  So basically Musk had a chat with the Saudis that did not include any due diligence, any percentages, or anything about the structure of the transaction and nothing has been submitted formally to the Saudis for the required review and approval.  The Feds would never accept this BS from an unpopular CEO like, say, Jeff Skilling.  It remains to be seen whether they will really go after cultural icon Musk.

Finally, I predicted the odd and relatively unprecedented transaction that Musk likely envisioned:

Here is what I think Musk wants -- he wants an LBO without any actual change in ownership. Basically he wants to create Tesla New, which will be private and not trade on the markets. He is hoping that all his current fanboy shareholders will exchange a share of Tesla for a share of Tesla New. Musk has already said he will do this with his 20%. In the extreme case, if every current shareholder wants in on the new private company, then no capital at all is needed for the LBO. Musk might admit that perhaps a billion or two are needed to buy out the few recalcitrants at $420, and then all the Tesla fanboys can enjoy short-seller-free illiquidity

There was no way that Musk could expect to raise $70-$80 billion ($420 times the float) or to run an already cash-starved business with that much debt.  The only way to imagine this is if the buyout was only of a small percentage of owners.  And sure enough, here is Musk this morning:

Therefore, reports that more than $70B would be needed to take Tesla private dramatically overstate the actual capital raise needed. The $420 buyout price would only be used for Tesla shareholders who do not remain with our company if it is private. My best estimate right now is that approximately two-thirds of shares owned by all current investors would roll over into a private Tesla.

I won't comment on whether this is possible because I don't know enough about security laws.  I have been told that the SEC would likely frown on a private company with no public disclosures that has thousands or even millions of individual shareholders, but again, I don't know.

I find it amazing that anyone would want to stay in on this basis, but like Musk, the Tesla fan-boys seem to care more about burning the shorts than the quality of their own long investment in Tesla.  How can moving your small (percentage-wise) investment in Tesla from being exchange-traded to being locked up in a private company possibly be an improvement?  Today your investment has total liquidity (you can sell any time), it has massive 3rd party scrutiny and accountability, and it has real-time price discovery.  You would lose all of that in a private company.  You can only sell when Musk lets you sell and at the price he chooses to give you based on whatever company information he chooses to release.  Choosing the private option as a minority shareholder is like saying that you would rather hold non-refundable airline tickets than fully refundable ones.

Postscript:  I am new to the world of short-selling fights, as I am not really an active investor and just got sucked into watching Tesla because I found it interesting.  But wow, the tribalism of politics sure has leaked into the investment world!  In tribal politics, we see people more motivated by hatred of the other tribe than by making progress on their own tribe's goals.  This same kind of "reasoning" seems to dominate a lot of the Tesla long-short battle.

Update:  Here is a new prediction.  For a while Elon Musk has claimed he will not have to raise capital this year.  Everyone basically looks at his numbers and thinks he is nuts.  What's more, given his $50 billion equity valuation currently, he SHOULD be raising capital now while his stock is high and thus his cost of capital is low.

But one way to look at this is if he raises $20 billion in equity to buy out the 1/3 he thinks will want the cash rather than the new stock, he could easily just make that $22 billion so the company has an extra $2 billion in operating cash and thus raise capital this year without it looking like he violated his promise not to raise capital.

 

How Politicians Very Carefully Prioritize When to Unleash the Coercive Power of the State

What's Going On At Tesla

Matt Levine of Bloomberg has many of the same guesses I made the other day (here on the transaction Musk likely wants, and here on how might paper over his lie about "funding secured").  Levine writes:

The intermediate possibility is that there is some sort of deep misunderstanding, that when Musk tweeted about “taking Tesla private at $420” and having “funding secured,” he didn’t mean what you and I and the SEC normally interpret those words to mean, which is that he would make a binding offer to buy any Tesla shares not owned by Musk and his financing partners for $420 a share in cash.He meant something more like: He would like to not be subject to the obligations of being a public company anymore, and it would be nice if there was a way to do that. After all Musk immediately followed up by tweeting about letting shareholders continue to own their shares in a “private” Tesla, which is not how going-private transactions normally work. There has been a lot of speculation about how that could be done, and I remain a bit skeptical, but the important point here is that if Musk believes that (1) there is actually a way to “go private” while keeping all of his existing shareholders and (2) most of his existing shareholders love him and would prefer to stay private with him, then he could rationally believe that he doesn’t need much financing. If no one will take the cash, then you don’t need any cash. Both of those things are kind of weird things to believe, but neither of them seems impossible for Musk to believe.

If I were Musk’s lawyer, and if he doesn’t actually have $80 billion of financing locked up, I’d be working on a termsheet for the board that (1) offers Tesla shareholders the choice between (A) $420 in cash or (B) shares in a new special-purpose-vehicle that will hold shares in a private Tesla (or whatever your plan is to let people hold on to their shares); (2) limits the cash consideration to, like, $5 billion, or whatever Musk can actually raise; and (3) has some sort of proration mechanism in case more people choose the cash than he can afford. Does this fit with the spirit of the going-private transaction that Musk tweeted about? No, absolutely not, not even a little bit. But it is … something. And then let the special committee reject it, and then quietly walk away and say “well no we were serious about the buyout proposal but it just didn’t work out.” Which is a much better position to be in than walking away saying “oh yeah sorry we were kidding about that.”

Another Phoenix Light Rail Fail: Light Rail KILLS Transit Systems

Well, another year's ridership numbers are out for Valley Metro and Phoenix light rail and they are just as grim as they have been every year since Phoenix spent the first $1.4 billion on the first leg of the rail system (source)

Now, this picture is bad enough, until you realize that Valley Metro completed a huge extension of the rail line in 2016.  In 2016 the line length was increased by 31% and the cumulative capital investment increased by 36%.  With, as you can see, essentially zero effect on rail ridership in red.  The only small highlight was that after falling for years, bus ridership actually perked up a few percent.  As you may remember from earlier posts, bus ridership could be expected to fall due to cannibalization from light rail, but in fact it tends to fall even faster than rail ridership rises, causing total ridership to fall.  The reason is that light rail costs at least an order of magnitude more (including amortized capex) per passenger mile than busses, and so light rail tends to starve the bus system of funds.  Every light rail system implementation has been met with the need to slash bus service to pay for the huge light rail costs.  So despite enormous operating subsidies and more than $2 billion in cumulative capex, rail ridership has been flat and total transit ridership has fallen.

But in fact the picture is worse than this when you look over a longer timeframe, which is why Valley Metro has probably changed their practice from graphing nearly 20 years of history to graphing just 6.  Here is an older chart of theirs I posted years ago: (the top year in this chart is the bottom year in the chart above)

I will get back to the annotation in a moment.  But notice that despite all the cost and disruption and higher taxes from the light rail system, total ridership this year of 66.8 million is less than any year since light rail was opened and baredly 8% higher than it was before light rail opened 10 years ago in 2008.  Just organic city growth and recovery of the economy since 2008 should have driven faster growth than this.  In fact, in the 10 years before light rail was opened, Phoenix transit ridership grew 70%.  If that organic growth rate in bus service had been allowed to continue without the backbreaking costs and limited capacity of light rail being added to the mix, we should have expected 105 million riders this past year, not 66.8 million.

The Weirdness That Is Twitter

So the last couple of days I was bored and I logged into Twitter for the first time in a while and spent a few hours trying to convince myself that if I really wanted to, I could build a presence on Twitter.   Increased my follower count from about 1000 to about 1300 and got some notice and retweets.  And pretty much zero satisfaction, so I think we are going to declare that experiment over for a while.  But, this time, unlike the last effort, I managed to pretty much remain a nice guy and not become a hateful troll, so that is a step forward.

Anyway, weirdly, I managed in the process to create my single most -- by far -- liked and retweeted post, and it is really random.  It was just a toss-off reply to @popehat when he asked rhetorically if dentists all hire awful lawyers.  So I wrote this (which is an entirely true experience)

 

My Guesses About $TSLA, and Why @TSLA Shareholder May Be Presented with a Bad Deal

@Elonmusk is facing real blowback for his management buyout by tweet the other day, in particular for two words:  "funding secured."  Many, including myself, doubt he really had tens of billions of dollars of funding secured at the time, particularly since all bankers and likely sources of funding as well as most large Tesla shareholders had never heard of any such transaction when contacted by the media.  The SEC is now looking into this and other Musk corporate communication practices.  If he lied in the tweet, perhaps to get revenge on the short-sellers he hates with an irrational passion, he could be in deep, deep legal poop, up to and including jail.

Let's play a game.  Let's assume he did NOT have funding secured at the time he tweeted this, and now is running scared.  What can he do?  One ace he has is that the board is in his pocket and (I hate to be so cynical about this) will likely lie their asses off to cover Musk.  We already saw the dubious letter the other day, from "members of the board" rather than officially from the board, attempting to provide cover for Musk's tweets.  This is not just a crony thing -- it is entirely rational for the company to defend Musk.  He is, in my opinion, a terrible executive but he is the avatar that drives the fan boys and the stock price.  The day that Musk leaves is the day that the company can really get its operational house in order but it is also the day the stock trades under $75.

So what can Musk do?  Well, the first defense might be to release a statement like "when I said funding secured, I was referring to recent conversations with ______ [fill in blank, maybe with Saudis or the Chinese, call them X] and they told me that if we ever were looking for funds they would have my back."  This is probably the best he could do, and Tesla would try to chalk it up to naivete of Mr. Musk to accept barroom conversation as a firm commitment.  Naivite, but not fraud.   I don't have any experience with the Feds on this kind of thing but my guess is that the SEC would expect that the CEO of a $50 billion public company should know the rules and legally wasn't allowed to be naive, but who knows, the defense worked for Hillary Clinton with her email servers.

But this defense is MUCH MUCH better if, in the next day or so, Tesla can announce a deal with X on paper with signatures.  Then Musk can use the same defense as above but it has much more weight because he can say, see, they promised funding and I believed them when they said they had my back and here they have delivered.

The problem with this is it would be really a deal being crafted for tens of billions of dollars on a very short timeframe and with limited negotiating leverage (X will know that Musk NEEDS this deal).  As a result, the deal is not likely to be a very good one.  X will demand all sorts of extraordinary provisions, perhaps, for example, a first lien on all Tesla IP and a high breakup fee.  I picture this more like the negotiation for bankruptcy financing, and in fact the IP lien was part of the financing deal Theranos made when it was going down the drain.  But put yourself in Musk's shoes -- jail or bad deal?

And likely his conscience would be clear because this deal would be killed quickly by shareholders.  That would be fine, because the purpose of the exercise would be to keep Musk out of jail, not to actually buy the company.  Tesla shareholders will still get hosed, probably having to pay some kind of break-up fee which any sane investor X would insert as the price for participating in this farce.  And we will go back to the starting point of all this, which is Tesla being public and focusing on operational improvement in what may be the most important operational quarter in its history.

Disclosure:  I have in the past been short Tesla but have no position in it now (I did short when trading reopened the other day after Musk's announcement but covered this afternoon).  I am not in any way, shape, or form giving any financial advice you should spend actual money backing.

Recommendation: 99Designs

I am going to a trade show in a month or two.  I bought one of the standard backdrop things and needed some art for it.  I was quickly told that all my attempts looked like bad powerpoint slides transferred to the backdrop.  So I tried a site called 99designs.  They have a whole pool of freelance designers that compete for simple jobs - logos, wordpress templates, backdrop art, etc.  I committed $250 to a design contest for my backdrop (the site takes some cut of that and the rest is a prize for the winner).  That was 2 days ago.  At this moment I have 35 different designs sitting there for me to comment on and choose from.  Almost any one would be acceptable, and many are fabulous.

This strikes me as a classic victory for the division of labor. I am getting what seems like a crazy amount of good work for $250, work I could not duplicate myself for 100x that.  I suspect that some of this stuff is super-derivative and is banged out using simple tools in just a few minutes, but so what?  They can do something fast that I can't do at all and we all benefit.

My End Game Prediction for @Tesla ($TSLA) if They Really Do Go Private at $420

Readers know I am in the campground business.   Years ago there was a trend towards building super-luxury campgrounds for as much as $30,000 a camp site.  I never understood how anyone could get a return from this.  Finally I had a guy from a large campground and RV park REIT tell me, "You know how you make money on a $30,000 a site campground?  You wait for it to go bankrupt and buy it for $5,000 a site."

This is what I think the end game for Tesla may be.  I just don't think there is enough available capital in the world, and enough operational focus in Elon Musk, to see their way through to bootstrapping an entirely new worldwide automotive firm, including new dealerships, manufacturing plants, charging networks, etc.  Remember, Tesla does not just need capital for R&D and manufacturing, they also need it for the whole sales / service / fueling network.  Kia, for example, can grow with less capital because it can get independent business people to invest in the service and dealer networks and rely on existing gas stations for the fueling network.  Tesla must build all of this from scratch because of choices they made early in their development.

Even without an LBO, I think they were going to fail at this (despite having some good products) and others disagree with me.  But given the amount of debt that an LBO at $420 might take, and the subsequent rejection of the largest public capital markets, I don't think there is any way Tesla could head off a failure.  People who want to lionize Elon Musk forget that SolarCity was headed for exactly this same kind of cash crunch, only to be bailed out by a crony insider transaction with Tesla (much to the detriment of Tesla shareholders).

Right now, GM, Ford, Daimler .. pretty much any of the auto majors, would do well by buying Tesla.  It would help them with an instant presence in the BEV market and it would help Tesla by solving some of the sales and service investment and manufacturing operations problems they have.  But Tesla is just too damn expensive.  Right now the company is worth more than either GM or Ford.

I see the future after at $420 LBO as a failure in 24 months followed by a purchase by an auto major thereafter.

Musk's Proposed Tesla LBO Price of 420: Intentionally Hilarious? My Guess Is Musk Wants An LBO Without Any Actual Change in Ownership

Today, following his usual practice of ignoring all the securities laws that other CEO's have legions of lawyers to educate them on, Musk teased a possible Tesla LBO in a series of tweets.  In case you are wondering, it is not generally considered best practice in legal compliance to issue such information in cryptic tweets, and it is definitely not usual to do so while the stock is actively trading.  You can read the whole story here, though it continues to evolve as the market has finally halted trading in Tesla.

Here is the part I found funny watching this in real time:

Mr. Musk’s account tweeted at 12:48 p.m. ET: “Am considering taking Tesla private at $420. Funding secured.” It isn’t clear what prompted the tweet. Mr. Musk has a history of joking on Twitter and sending erratic tweets.

About 30 minutes later, the account tweeted “420” in response to a reporter’s tweet asking what price buyers might pay.

When this came out, I honestly thought "420" was an admission by Musk of a drug-induced mental state when the previous tweet went out, but in fact it appears to be his target price for the LBO.  Some quick thoughts

  • This would fit Musk's personality, as he seems unable to ignore those shorting Tesla stock and would get the twin satisfactions in such a deal of a) burning a lot of current shorts and b) making shorts irrelevant in the future as going private ends the active market for the company.
  • The implied valuation would be insane, something like $75 billion in equity (compared to GM and Ford which are both around $50 billion) plus $9 billion or so of assumed debt.  Tesla is already at the breaking point on debt so it is unclear where the funding would come from -- LBO's generally increase leverage and Tesla needs to decrease it, and needs a lot more capital for operations and growth going forward.  But Musk claims he has the deal funded already.
  • Part of the clue to the capital availability may be the Saudis.  It was revealed today that the Saudi's own just under 5% of Tesla' stock.
  • Here is what I think Musk wants -- he wants an LBO without any actual change in ownership.  Basically he wants to create Tesla New, which will be private and not trade on the markets.  He is hoping that all his current fanboy shareholders will exchange a share of Tesla for a share of Tesla New.  Musk has already said he will do this with his 20%.  In the extreme case, if every current shareholder wants in on the new private company, then no capital at all is needed for the LBO.  Musk might admit that perhaps a billion or two are needed to buy out the few recalcitrants at $420, and then all the Tesla fanboys can enjoy short-seller-free illiquidity.

This is great for those who want out, but for those who are in for the long haul, it seems like a lot of capital just to remove short sellers from the picture.  This is a company that does not have anywhere near enough capital to do the things it has already promised to do (China plant, model 3 ramp, $35,000 model 3 car, semi, pickup truck, two-seater, battery storage projects, revive SolarCity, etc.).  For those who think that the capital will always be there for Musk, just remember SolarCity, which was close to bankruptcy and in steep decline when Musk engineered the insider deal with Tesla.

Update:  This statement from a Morningstar analyst makes no sense to me:

Taking it private would allow the billionaire “to not constantly worry about going to the public markets for more money,” Mr. Whiston said. “He can do what he needs to do behind closed doors and keep growing the company without all that extra scrutiny.”

I get the second part -- Musk would love to avoid the extra scrutiny -- Theranos probably survived years longer as a private company than it ever would have as a public company.  But I don't understand how it stops the need to go to the public markets for more money.  Cash needs are driven by Tesla growth plans and they still need a LOT more.  Going private does not make this easier, it makes it harder by cutting off one huge source of capital (public markets) and potentially loading up the company with extra debt from the privatization transaction.

"True poverty is not being able to afford some small principles" -- When Sarah Jeong Hammered the Powerless

This is one of the more remarkable pieces I have read in a long time.  Shenzhen Tech Girl Naomi Wu describes how Sarah Jeong and Vice magazine refused to acknowledge that maybe a woman in China is in a different situation than a woman in Brooklyn and outed her for a few clicks.  An excerpt:

These are not games you play in China, it doesn’t matter if the sum total of their experience living a warm sheltered life in America makes them think it will probably be ok. Things are not the same here. That is not how agreements with sources works, Vice wasn’t in a position to understand the exact nature of the risk I face or what limits have to operate within- and didn’t care to find out. It doesn’t matter if the story “reads positive” or “seems fine” to an American reader- they are not who I have to be concerned with....

It’s not that a White American can’t understand China- that is nonsense, there are countless American journalists and scholars here that are experts in this field that Jason Koebler or Vice could have contacted to verify what I was telling them, I begged them to. They simply didn’t care....

Then Sarah drops a veritable atom bomb of an Appeal to Authority, she is Korean (having lived a full week as an adult in Korea). South Korea is pretty much the same as Mainland China, therefore I was never in any danger. She invokes the monolithic Asian culture myth precisely because she knows her largely White audience believes this anyway.

You can get your full daily RDA of irony by reading it all.

Tesla New Math

I was reading the Tesla shareholder letter and I found this funny.  Tesla began by celebrating that it produced 5,000 Model 3 cars  in the last week of Q2.  And also

Highlights from the company’s letter to shareholders included the promise to produce 6,000 Model 3 sedans a week by late August, and to produce 50,000 to 55,000 of the sedans in the third quarter.

So we began the quarter at 5,000 per week and will hit 6,000 a week about two thirds of the way in so that we will on average produce around 4,000 a week for the quarter.  Right.

 

A Small Suggestion for Maximizing Value of Your Loyalty Points

It is useful to have an algorithm for spending your travel (hotel, air) loyalty points.  Years ago I generally saved them for big vacation trips, usually to Europe or Hawaii.  These were the most expensive trips I took and it felt good to bring their cost down.

Two things have killed this algorithm for me.  One is that most major airlines don't have squat for points availability on popular Trans-Atlantic and Hawaiian routes (British Airways, I am looking at you).  The second change was that I started to read some of the web sites focused on travel points, for example the Points Guy.

There is good information on these sites, but a lot of the detailed strategies are way to arcane and time-consuming to bother with (e.g. Take your American Express points and convert them into gift certificates denominated in Ecuadorian currency, and then apply these for double credit... etc).  But the one takeaway I have had is to think of your points like a currency with a constantly varying exchange rate to dollars, and find the opportunities to spend the points at the best exchange rates.  TPG  maintains a monthly estimate of the value of each type of reward point.  Expected value is between 1 and 2 cents a point for most.

My new algorithm is to use my points when I am getting at least 2 cents for them, and hopefully more.   Take hotel points for example.  From time to time I will find that there is some squeeze in hotel rooms in a city I want to visit and the price of most hotels have risen 50-100% for these days.  This is a great time to use your points, particularly if you are locked into the dates and can't go on a cheaper date.  The reason for this is while the price in $ goes up, the price in points does not.  There may be some hotel chains that limit availability, but Starwood for example does not.  Let me give an example.

In several weeks I am taking my wife for a nice weekend to see her friends in Manhattan.  We are locked into the dates.  But it turns out that there is some UN event and all the hotel rates have skyrocketed even higher than usual NYC hotel rates.  It was just going to be too expensive to stay in a really special hotel.  Until I thought of the St. Regis.  It is not my first choice, but it is in Starwood and with the Starwood Amex card I have a zillion points.  Turns out for a basic room the nightly rate had gone all the way to $1500 (welcome to NY).  But the points cost for the same room was the same as it ever was, 35,000.  I was effectively getting 4.3 cents each for my points.  One could argue that since this was not my first choice, I should compare it to that alternative, but even with a cheaper rate at that hotel this was still 2.6 cents of savings for each point.

For American Airlines, I try to do the same thing.  Most transcontinental flights have no points availability, or have availability at really bad exchange rates (The one exception I have found is Cathay Pacific, which takes American points and tends to have a lot of award seats).  I increasingly use my points domestically.  When rates shoot up for a particular flight, there still may not be availability but sometimes the opportunities are there.

Open Letter To Walmart: I Have a Business For You

The last few days I have written of my frustration at trying to get local business bank accounts, the sole purpose of which is to accept deposits of cash from my local campgrounds and then transfer that money to my main account.  This is a major hassle as opening a bank account as a corporation is not a simple task and, as I have found out, some banks won't even accept this sort of business.

Here is what I need:  I need a national network of offices, many in rural locations, that will take my cash and ACH (a cheap form of wire transfer) the money to my bank account.  So naturally, I think of Walmart.  Walmart already is used to handling a lot of cash and Walmart is already starting to offer a number of consumer banking services.  One reader told me about the Bluebird service, a joint effort between Amex and Walmart to create a sort of virtual consumer bank.  I love the idea, but it has rules limiting it to consumer accounts.

So here is my business for you Walmart

  • I bring my cash to you at any store.  You zip it through a counter.  We agree on the amount.
  • You wire my main account with the money.  I will give you three days so you can use the cheapest transfer and have time to get the cash into your own account.
  • I will pay you 100 bp (1%) of the cash value for the service

Currently I pay merchant processors 270-300bp for those transactions and I have to wait 3-5 days for the money to hit my accounts.  So 100bp on cash would be fair for me, and I would guess fair for Walmart.