Short Selling Tesla and Japanese Businesses (w/ John Hempton)

John Hempton, CIO of Bronte Capital, has a very interesting interview on Real Vision. He talks about Tesla, red flags and Japanese businesses. I also strongly suggest to check out his,, which is always great to read.

What I like about John Hempton is the way he breaks down businesses and complex situations. I don’t agree with everything he says but his insights are welcome. He thinks differently about markets and businesses.

It was filmed in April 2019 and published on Youtube in September.


American Factory

Image result for american factoryThis is the Obamas’ first film produced by Netflix. This is a story about a Chinese billionaire who bought a closed GM factory in Dayton, Ohio. His plan was to turn the closed plant into the US outlet of Fuyao, his global manufacturer of automobile glass. This would involve bringing staff over from China to work side by side on the factory floor with their American counterparts, training them and creating around 2,000 jobs. Things seem to come full circle because it used to be that American companies move to China to make their products. American Factory is the first film released by Higher Ground, the Barrack and Michelle Obama’s production company, to make TV series and movies touching on such issues as race, class, democracy and civil rights.

The reopening of the plant brought optimism, hope, and a brighter future for the workers and a region that has been badly hurt by the outsourcing of jobs to cheaper countries. So far so good. Then the new reality hits home.  First it was all sunshine and frustration and anger by the end. Gone are the cushy well-paid unionized GM jobs. The $30/hr job is now $12/hr and change. Management is Chinese and they do things differently. Very differently.

The Fuayo plant has two very distinct culture under one roof. The Chinese and Americans are trying to have one vision and to be one team. But it doesn’t take long to see the clash of cultures. Both the Chinese and Americans want the same thing; a good job, a good factory, a good atmosphere, and a better future. Everybody wants the American dream. The nice home with the white fence. It’s how you achieve these goals that is the dividing issue.

The American worker is less productive than the Chinese worker. But workers’ safety and regulations are important. You just can’t dump chemicals down the sewer pipe. For the Chinese employees, productivity and hitting your numbers are priority. Everything else is secondary. Americans like their weekend and a work-life balance. The Chinese have one or two days off a month. They might not see their family for months or years. It’s really hard to conciliate their differences. There are major gaps between both culture. At first there was some American representation on management. But over time, due to lack of productivity and the inability to solve the problems, the Chinese eventually pushed the Americans out of management. The American worker had no voice and exacerbated the problems.

It’s a good documentary. It shows the two side of the story. In one instance some Americans workers got to visit a Fuyao plant in China, question of learning and putting yourself in the other person’s shoes. Having lived and worked in Asia in the past, I definitely know what they were walking into. It’s eye opening and the culture shock hits.

In one instance the documentary follows one woman who lost her job in 2008. She had nothing for four years. Loss her home and car. She found work at Fuyao, found an apartment, and got herself on her feet. She regained a feeling of independence. She was climbing back into middle class. Then it wasn’t enough. She started to flirt with the union movement and got fired. She loss everything she worked for. Despite its flaws, Fuyao was the best game in town.

Eventually labor relations is at the center. The plant workers might have a case for joining an union but I don’t think its the right path to follow.  I was in a union once and there’s a catch. I went to a union meeting to see why I was paying union dues and its pure brain wash. The people preaching that union glory stuff are real politician. They want to help but they are not helping. It’s delusional to think they will fix all the problems. Like politicians they make nice speeches and promises. The thing is that the people who want a union are often the most vulnerable. They are less educated, older, and they know their job are at risk. Get a union in and the good workers will leave for better opportunities. Worse, get a union in and the plant might closed and the workers lose everything they have been fighting for. I remember an instance where I grew up, there was an unionize plant that refused to certain demands and the plant shut down, putting hundreds of people out of work. A lot of families lost their home. It’s the cold hard truth. Relations will not get better. They need to sit down and work things out. This situation could be avoided.

It’s hard not to admire the Chinese work ethics. Work is the #1 priority. There seems to better nothing else. But eventually that will change as they got more prosperous. The Chinese people will drift over time as they get more comfortable.  In the old days, all Chinese people wanted in life is to provide enough food for their family. The new generation of Chinese are born in modernity. They want it all. Each new generation creates a new base line. Our grandparents worked way harder than we ever did for much less. That’s just how things evolve and it’s totally normal. You want your kids to have a better life than you. That’s the whole point.

Labor relation issues are one thing. But there’s a new threat on the horizon. Actually it’s already here and it’s just getting started. The age of robotization and AI is on the way. We are in the first inning. Automation means standardization,  more production, and more efficiency. It also means less workers. Automation is a global phenomenon. I don’t believe everyone will find work. It will require re-training and that’s not easy for older workers. But I’m not as pessimistic as the media portrays it. There will be new opportunities. We just don’t know what they will be. Two hundred years ago, 90% of labor worked in agriculture. Now it’s less than 2% and we produce way way way more. We have “disruption” all the time. The combustion engine/car, the phone, the computer, the Internet. Workers gets displace all the time as we progress. I received an email from friend that works in a warehouse with a bunch of job listings. A bunch of these jobs didn’t exist ten years ago. We won’t know what the jobs of tomorrow will be. Who knew you make a living being a Youtuber?

Being A Risk Manager Isn’t Easy


Grant cartoon
Source: The Insurance Observer , June 1994



Legacy of Benjamin Graham

The Heilbrunn Center for Graham and Dodd Investing created a video titled ‘Legacy of Ben Graham,’ which contains bytes from some of his students, such as Warren Buffett and Irving Kahn, on how Graham’s teachings changed their lives.

The Demand for Income Will Only Get More Acute

The demand for income will only get more acute if Citi credit Matt King’s forecast is correct. In a June 27 report called The Power of Doves, Mr. King wrote,

“secular stagnation is a real phenomenon … the bursting of [asset] bubbles has caused the last few recessions, but in each case the bubble was ultimately resolved by the taking on of still more debt. That each bubble ultimately proved vulnerable at successively lower levels of real interest rates is therefore not a bug, but a feature. .. it seems highly likely that the next recession will also be caused by a sell-off in asset prices, conceivably at an even lower level of interest rates still – and probably long before inflation has risen to reach [developed market] central banks’ targets.”

The low productivity growth inherent in secular stagnation, along with occasional asset bubbles and low inflation, is a recipe for lower and lower interest rates as North American populations age and need reliable cash flows.

Terra Incognita

Fall is around the corner and I hope everyone had a great summer. I’m taking this opportunity to re-connect and share with you a short missive.

If you are trying to make sense of this economic environment and you can’t, welcome to the club. I don’t have forty year plus of experience behind the belt and when I talk to people who do, they are clueless. The environment we are in is terra incognita. Sure we can go back in history to study the cause and effect of certain specific policy, but any attempts feel useless when applied to today’s climate. I don’t remember being tested on negative interest rate in university. We never lived in a time with so much global central bank intervention. Their collective action is distorting the “normal” course of action, if we assume there’s any meaning left to the word normal. We have over $16 trillion in negative interest rate bonds. I’m not a macroeconomics expert, but common sense dictates that when things are so out of whack, it’s not going to end well.

The dreaded over-used expression “this time is different” comes to mind. Basically we claim that the old rules of valuation no longer apply and that the new situation bears little similarity to past disasters. There’s the sentiment that the important lessons from history to show us how much–or how little–we have learned don’t apply anymore. Throughout history, rich and poor countries alike have been lending, borrowing, crashing–and recovering–their way through an extraordinary range of financial crises. We just had a major generational financial crash just ten years ago. Yet, that harsh lesson seems like distant history. Total global debt levels have reached a whopping $246 trillion as of Q1-2019 – up from $164 trillion in January 2009, the time of the last financial crisis. This level of debt represents almost 320% of global GDP. The “time” might be different, but the outcome might be similar.

Here are some economic and financial topics that are just mind numbing. Feel free to reach out to discuss any.

  • We are apparently living in a period of “strong” economic growth, though it has been slowing down a little bit lately. Still we are at full employment and wages are rising. Normally during good economic times the government might call for a budgetary surplus. This is, basically, standard Keynesianism. But instead governments are running major deficits like they are trying to get out of a major recession. This situation raised three important questions that I don’t see anybody talk about:
    1. What will governments do to stimulate the economy when a real recession hits? The classic economic 101 textbook response is more stimulus/deficit/debt.
    2. This led to question #2: How are we going to pay for these deficits? Of course we can’t raise taxes of 1) it won’t help the economy and 2) Good luck getting re-elected. So it has to be more money printing and monetary stimulus.
    3. I don’t see any politicians, or financial media being alarmed with the ever growing deficit. There are long term consequences to this type of action. The deficit problem is not urgent right now but if we don’t address the problem, the problem will eventually address us and that’s not good. We are perpetually “kicking the can down road” until the can becomes a massive iron wrecking ball that is stuck in the middle of the road. Any attempt to kick it will break your foot. Worse, it might roll back and crush us.
    4. I asked a leading economist in Canada these questions and his answer was: “Good questions”.
  • If the economy is so “strong”, why can’t it handle interest rates north of 2.5%. Really, 2.5%, it’s not much. To be relative, the rates were at 19.5% in 1981. Imagine buying your house on a credit card. To be fair, homes were a fraction of today’s cost (a prolong period of low rates led to very expensive housing). Now the Fed has lowered its rate in July and has indicated that it might go lower. Actually they have clearly indicated that they don’t know what they are doing to do. Read: Fed’s George: It’s ‘too soon’ to judge next move on rates.
  • Then there’s M.M.T. that is gaining a lot of traction. Politicians on the left and economists are talking about M.M.T., which sounds like the street name of a new drug. M.M.T. actually stands for Modern Monetary Theory, which is pushed by Bernie Sanders adviser Stephanie Kelton. Mrs. Kelton, the face of M.M.T., believes the government should just print more money. When asked “How will we pay for it?” she says that it shouldn’t be a central question in American politics. Simply printing more money is always the answer. When I first heard of M.M.T. it sounded like a joke an economist would tell. But economists are not known for their sense of humour and the joke got picked up by politicians and the media and M.M.T. is now a real “serious” discussion topic. How does it pass the common sense test? But the problem is by asking that question we are assuming there’s common sense left out there. M.M.T. is a polarizing idea. Kelton has been described as an economist with an idea “that will either solve the world’s problems or send it into ruin!” Didn’t Zimbabwe and Germany, among many others, went down that road in the past? Historically speaking, printing too much money led to hyperinflation. But I guess this time is different. Kelton is working on a book, “The Deficit Myth” which will come out next year. It will be in the accounting & finance section, not fiction.
  • The puzzle of negative interest rates. Imagine lending money to someone and having to pay for the privilege of doing so. Or being asked to invest and informed of how much money you’ll lose. What if I said I wanted to borrow $100 from you and pay you back $98 five years later? Would you do it? Sounds absurd, but increasingly that’s the global bond market these days. There are currently more than $16 trillion (30%, and counting, of the global tradable bond universe, according to JPMorgan) in negative yielding debt around the world as central banks try to ease monetary conditions to sustain the global economy. This is possible because Denmark, as well as Sweden and Switzerland, has seen rates in money markets drop to levels that turn banking upside-down. Swiss banks in particular, where interest rates are negative at -0.75 per cent, have been passing on these rates to clients with high cash balances. Credit Suisse and UBS had held fire, but recently said they would have to start passing them on, too. Jyske Bank will effectively pay borrowers 0.5% a year to take out a loan. How? Jyske Bank is able to go into money markets and borrow from institutional investors at a negative rate, and is simply passing this on to its customers. Negative rates are counterintuitive, unprecedented — and to my mind — mind-bendingly insane and downright scary. They are like a parallel universe where everything you’ve ever learned about finance and human behavior is turned upside down. Worse, negative rates are being normalized by economists, bankers, and commentators. Worse, I have a funny feeling this will end badly. Negative interest rates have all the hallmarks of serious trouble for the financial markets; an anomaly growing in scale which seemingly came out of nowhere that is under-recognized, poorly understood and dismissed as not consequential. I’m not sure what form the ugliness will take or, more vexing, what we should do about it.
  • A lot of people think cash is the safest bet in a world of negative interest rates….there’s a cost: inflation and referring to investors who have stayed on the sidelines and missed out on the great bull run in equities. Yet perception of risk is an emotional thing. If people feel comfortable paying extra money in the form of negative rates for the known loss they will suffer on cash versus the unknown and potentially larger loss on riskier assets, it can be hard for wealth managers to talk them out of it.
  • Brexit is a full-on terra incognita. That’s a storm nobody has figured out how to navigate. The Americans and English have a thing for turning politics into awesome theatrics performance. How is this the real world?
  • The WeWork IPO is being sold as the holy grail of investments…The mission of WeWork is to elevate the world’s consciousness. That’s very nobel for an office space rental business. The company disclosed last month of net losses of more than $900 million for the first six months of 2019 on revenues of $1.54 billion. It will achieve 5-star status when the losses are higher than the revenues. WeWork has long-term lease obligations at $17.9 billion that is financed by short-term assets, a recipe of disaster when the next downturn comes. Basically the short-term assets melts and you are stuck with the debt. This stock screams “buy” when the CEO and co-founder cashed out of more than $700 million from his company ahead of its IPO. But at least he returned around $5.9 million worth of stock to the company, which he had originally received in exchange for the “We” trademarks. I’m not making this stuff up. Maybe the trademark “I” is my ticket into the sun. Yet, despite the tons of red flags in their S1, WeWork is expected to be valued around $47 billion because WeWork consider themselves as a “platform tech” in the “space as a service” segment instead of where it should be: real estate. Who is buying this stuff? What I noticed is that stocks listed on the stock market are either trading at 10x P/E or 100x P/E.

To conclude, governments and central banks are acting like they are in a recession with big budget deficit and excessive monetary stimulus policy. Any attempt to normalize the situation has encountered hiccups, like the tamper tantrum (a bout of panic selling after Federal Reserve hinted at a reduction in stimulus) and the December 2018 mini-correction.

For investors, attempting to figure out how to play these developments is a crazy game. Just don’t. Add in a dose of trade war, political circus, political uncertainty, Twitter and you have an instant aging formula.

Happy fall,


The Story of a Great Monopoly

I found this great read while doing some research. It’s from The Atlantic’s archive. It was published by H.D. Lloyd on March 1881. The article grabs the climate of the time on railroads, Standard Oil, Rockefeller, the Vanderbilt, corruption and politics.  The article address the “railroad problem” of the time and the power of monopolies. It’s a big article and it will take a while to read. If you read the book Titan, you will like this article.

Currier & Ives - Library of Congress
Currier & Ives – Library of Congress

The Story of a Great Monopoly

Repost from The Atlantic
By H.D. Lloyd

”These incidents in railroad history show most of the points where we fail … to maintain the equities of ‘government’—and employment—‘of the people, by the people, for the people.’”

Continue reading “The Story of a Great Monopoly”

SNC-Lavalin: Buy A Highway, Get The E&C For Cheap

This is my most recent research piece on SNC-Lavalin Group published on Seeking Alpha: SNC-Lavalin: Buy A Highway, Get The E&C For Cheap.

Unfortunately the publication of my article corresponded with a significant press release from SNC and a public statement from the CDPQ . On the news the stock went from $25 to $21 per share. That’s my timing for you.

Of course nobody wants to see bad news but I believe this is the news that we were looking for. I see the recent announcements as positives.  It’s like a doctor telling you that you are getting brain surgery to remove a tumor. It’s not good news but that’s what needed. Short-term pain for a better future.

In the article I said that I wouldn’t be surprised that the new CEO takes the quarter as an opportunity to ditch guidance and dump more bad news and that’s exactly what happened. SNC took a $1.9b impairment charge link to its oil and gas division, Kentz. They already took a $1.2b impairment charge back in February. SNC bought Kentz for $2.1b back in 2014. The CDPQ, the largest shareholder with 19.9%, publicly came out against the deterioration of SNC performance. Back in the spring the CDPQ said they will “be a rock” for SNC, I guess they are losing patience like everyone else.

SNC is facing many headwinds, operationally, financially, politically, reputationally…let’s quickly address them:

  • SNC has been having operational issues. SNC some good assets and bad assets. The recent restructure announced will have SNC focus on its strong points. SNC is still in business. They are still winning contracts. SNC is walking away from Turnkey lump sump projects, the key source of its problems. Exit: O&G, mining, and construction which are its least profitable activities.They will focus on design, nuclear, engineering services “EDPM”.  They will be less risky and more cash-flow predictable. More details on the new strategy is expected in the fall. The future SNC might look like more of a WSP Global or Stantec.
  • Finance: SNC took on a lot of debt for its WS Atkins acquisition of $3.6b in 2017. Despite paying a big price for Atkins, it’s one of the strong points of SNC today. To deal with the debt SNC is selling part of their private highway, cut the dividend, and is engaged on a cost cutting program. Once the sale is completed SNC debt’s level should be back to their historical norm of low debt. SNC also has $13.87 (post-H407 sale) of net assets in their Capital Investment Portfolio.
  • Politics: Unfortunately SNC was in the middle of a political scandal for the Trudeau’s Liberal government. SNC was also a victim of a diplomatic spat between Saudi Arabia and Canada. There’s not much in SNC’s control at the moment. Hopefully after the election the government will finally find a solution to SNC’s legal problems.
  • Reputation: SNC didn’t murder anybody but you would think they did. Their reputation is not good. It’s affecting employee morale and departures. The public perception of the company is toxic. SNC is managing a PR crisis. SNC, a 100+ year old company, has its brand; a once valued intangible asset is now in the garbage bin. You can change a reputation. Merck’s Vioxx is responsible for the death of 38,000 people and the company is still around. With SNC it will take time. I don’t expect anything before the Canadian Federal election in October. Plus they have to Libya bribery court case they have to deal with. It will take a lot of time, a string of good news/quarters, and communications to deal its reputation.

With the recent announcements, SNC has a market cap of $3.6 billion, the same price they bought WS Atkins in 2017. Atkins is one of the most respected planning and project management firm in the world. The stock is cheap and very attractive for a competitor looking to expand. The CDPQ has ~20% and RBC recently built a 16.6%. I understand this is a difficult stock to hold or even buy. It’s not supposed to be easy. I believe SNC will eventually emerged a better company.

I suggest to read the article for a more in-depth analysis.

GameStop – Hard Reality Ahead

I’ve been following the retailer GameStop (GME) on and off for a couple years now. It’s trading at $4.80 a share with a market cap of $490m. The stock has been in free fall for a couple years now.  It did stabilize for a bit last year when they were shopping the company around but they ended up not doing anything.


They recently slashed the dividend that had a yield of over 10%. The move will save them $157 million a year. When you see a juicy 10% dividend yield, it usually means that it’s too good to be truth. The large majority of times it means that the company is not healthy and I’m not surprised they cut it. They have a failing business with $468m in debt plus $550m in operating leases.

I’m looking at it for a shorting point of view. Shorting is very risky even though GameStop gives you the vibe that it’s the next Blockbusters. People are playing videogames more than ever. It’s just they are not buying their games at GameStop like they used too.

GME might survive, in a different form. They have a collectible business that is growing but very small. Somebody might take them private. They just announced a Dutch Auction buyback. Maybe its a zero. They have enough cash to pay their bills for a while. They have Net Operating Losses (NOL) which could be attractive to another retailer. Shorting is a hard game to play. Plus betting on a retailer going to zero is not a game I’m comfortable with. That’s why I don’t short.

They operate 5,800 stores in 14 countries. I don’t know what’s going with They bought the company in 2015 for $140m and I know they took some impairment charges on the brand name.

The reality is that the long-term outlook of their core business doesn’t look good. They are in the wrong line of business at the wrong time. Sure the next generation of consoles (PS5 and Xbox) might give them a short-term boost (or hurt them because people are delaying their game purchase), but the hard reality is that all the games are going over the cloud. It’s much more convenient and more profitable. They are cutting out the middle men by going directly to the consumer (digital delivery). This is a pattern we have seen with music, video, and now video games. It’s just taking longer for video games because of the more demanding hardware/software/Internet requirements. We have the technology today. When was the last time you bought a music CD or a DVD? Video games are going the same way.

A hobby retailer that seems to be doing well is Games Workshop (GAW.l), which is the company behind Warhammer. Maybe GameStop with their collectibles and reach can emulate the good side of that business. But it would have to be on a smaller scale on cheap rent real estate. That’s probably not what investor want to hear.

Ironically, GameStop was once a streaming video game innovator. It bought Spawn Labs in 2011 to create a kind of Netflix for video games. But it was too early: The technology wasn’t quite ready, and GameStop shut down Spawn Labs in 2014.

The competing landscape is also changing. Google is getting into gaming with Stadia, a cloud gaming streaming service. Apple is getting in the business too. Nintendo is pushing their games on the mobile. And Sony and Microsoft are working on the next generation of console.

I don’t know what happened in the board room when they were looking to sell the company around. Maybe the offer wasn’t good enough (I bet it looks great in hindsight now). The business of selling new and used console is a dying one. The business would be good in the hands of independent retailer or a private owner that has the patience to work things out.