Delisting China Stocks?

I’m been trying to make sense of the U.S.-China escalating tension. I believe we are in a cold war. It’s been brewing in the dark for years, each player placing their pieces, trying to get optimal positioning once it breaks out. The cold war is being fought on many front. There’s a trade war, a tech war, an economic war, a covid war, a political system war, and there’s the Hong Kong issue (and Taiwan). Washington is considering a range of sanctions against Chinese officials and firms as punishment for Beijing’s crackdown on Hong Kong. The world is being forced to choose between the U.S. or China, just like the world had to choose between the Soviet Union or America. The list of issues is long. Often, for an successful oversea company trying to growth, going to the NYSE or Nasdaq would make sense. 

I’m trying to assess the U.S. threat to delist Chinese stocks. Are they dumb crazy? Is it just politics? Or does it make sense?

  • Over the years, American investors have been pumping billions of dollars into Chinese firms listed in the U.S., from giants like Alibaba (BABA) and Baidu (BIDU). Investors have been able to profit from the explosion of e-commerce in China, even though the likes of Facebook and Inc. are largely shut out of China.
  • Recent admissions of accounting fraud at Luckin Coffee have prompted heightened scrutiny of U.S.-listed Chinese companies.
  • There’s a threat to evict some 170 Chinese companies listed in the U.S.
  • The move is more than just political. China, uniquely among major world economies, bars the U.S. Public Company Accounting Oversight Board (PCAOB), from monitoring corporate audits, considering that a national-security risk. Chinese audits are done on a completely different basis.
  • The Senate passed a bill giving all Chinese companies three years to let the PCAOB in, or be kicked out of U.S. markets. It will likely clear the House.
  • Rumblings about China companies not playing by the same rules have been around for years. The bill will force Chinese companies to abide by the same accounting rules as U.S. companies listed on the NYSE and Nasdaq.
  • The bill will also require public companies in the U.S. to disclose whether they are owned or controlled by a foreign government, including China’s communist government.
  • China declares states secrets in not allowing full transparency of corporate books, especially those with heavy state involvement.
  • Why close the books? Probably what they find won’t be pretty. Opening corporate records could reveal embarrassing links between the nation’s leaders and valuable share packets. Stuff that they don’t want to come out.
  • The question now is whether we will see Chinese companies give in to the new rules or relocate outside the U.S.
  • Two of China’s most valuable U.S.-listed companies, NetEase (NTES) and (JD) are pushing ahead with multibillion-dollar share sales in Hong Kong.
  • Chinese stock can thrive without a primary U.S. listing, look at Tencent. If you have a good company, you will likely find capital.
  • Despite the issues with Chinese companies, attracting capital is one of the U.S.’s major force. It’s very important that they keep that advantage. I bet London and Singapore is looking for take advantage of the dispute.
  • The U.S. instead should have policies to attract listings and capital. One idea is hiring high quality annually-inspected US audit firms.
  • Companies with good oversights and financial control would probably trade at a premium. Investors prefer companies that have oversight.
  • It’s important for any company to play by the rule. I don’t think the idea of crippling Chinese capitalism by denying it a listing will work. It’s probably good domestic political firework, but it won’t amount to much. It will probably hurt the country by pushing companies to look elsewhere.
  • Despite the issues, the U.S. and China should work out their problems. It’s what’s best for everyone’s interest. They need each other. They depend on each other.
  • China should play by the same rules as everyone. The U.S. should go back to the principles of what made them great.
  • Get each country’s top three negotiators and send them on an island to work it out behind doors.

Thanks for reading and have a good weekend,


Insights on Oil

oil-gifIt’s not breaking news that the energy sector has been a disaster zone this year, as the coronavirus pandemic has decimated global oil demand. There’s an assumption that anyone looking to invest in energy stocks, and oil stocks in particular, is an idiot, and that assumption appears pretty reasonable—if you’re looking in the rear-view mirror. There’s might be better days ahead for the industry. But “when” is the key question. There’s an old saying in the oil industry: The cure to low prices is low prices. I expect more carnage in the short-term before it gets better. Companies will be destroyed. There will be survivors that come out on the other side looking stronger. Their shares are pretty attractive right now. But who will survive?  Energy is essential. Although demand is down right now, the world is going to need more energy in the future. Low-cost energy will help to boost the global economy.

But it’s my opinion and I have no money on it, no skin in the game. The sector is too insane for me. It’s driven by too many large actors with non-economic motives (e.g. Saudi-Arabia). Anyway I’ve been reading a lot news of the sector and here are a few insights I picked up. Sometimes in carnage there’s glimmers of hope.

  • I can’t think of an industry in recent time where even though things could get worse, they got really bad. Predicting a massive drop in oil prices, sure. Predicting negative oil prices? That’s a job losing proposition. Investors in oil have been suffering for a long time.
  • The market is efficient at pricing in risk. Oil prices have collapsed twice in the past six years. That would tell investors there is a greater likelihood of that happening again. If you’re an operator, this means you might require a higher return than in the past because the risk is greater. If you’re an investor, you require a higher rate of return before you’re willing to invest. Thus, when demand comes back and oil prices recover, the commodity price might be a little higher than it otherwise would have been, depending on how high you need it to be to get that marginal barrel produced.
  • The world is still highly reliant on hydrocarbons. Renewable-energy sources are growing, but long-term demand for oil and natural gas is growing faster in percentage terms.
  • The May futures contract for WTI crude turned negative in April (-$37 a barrel), as demand plummeted and storage capacity ran out. That seemed to be an unusual set of circumstances with open futures contracts and perhaps some unsophisticated investors who got stuck. The lesson: Don’t hold financial contracts that you can’t honor as expiration approaches. With limited-to-no storage capacity available at the delivery point for the WTI oil-futures contract on May 19 (Cushing), so holders of financial contracts will need to sell prior to expiration. If open interest remains high as we approach expiration, then negative oil prices are possible again.
  • Negative oil prices were an anomaly—a function of a timing mismatch between the pace of demand reduction and that of supply reduction.
  • You need to break down the oil industry in two players: Producers and refiners. In between you have the pipeline, storage, and the infrastructure (mid-streamers). In normal times, good news for producers would tend to be bad or neutral for refiners, because refiners have to buy from the producers.
  • The hope is that the oil market rebalances and every part of the industry improves — oil and gas producers make more money selling crude, refiners sell more gasoline, and pipelines see more activity.
  • Refiners have been cutting back on processing crude because there are too few buyers. No one is driving as people stay at home to stop the virus, and gasoline is normally the number one use of crude in the U.S.
  • U.S. oil prices have jumped 99% in just the past week, an incredible performance that has made energy a top performing sector after months of under performance. Investors bet that companies in the beaten-down sector can come back from a historic rout in the first quarter. Even with the latest surge in stock prices, it should be noted that nearly all energy stocks are down by double-digit percentages for the year. Crude is up for two reasons:
    1. One is that investors now expect demand to return for major products like gasoline and diesel as countries start loosening lockdown orders imposed to stop the spread of the coronavirus.
    2. That oil companies have gotten more serious about reducing supply. U.S. oil production has already declined by almost 1 million barrels a day since it peaked in March, according to Rystad Energy.
  • The Texas and the U.S. responds to market prices, not government or OPEC. Earnings releases from U.S. oil companies show they’re prepared to make dramatic cuts.
  • The idea of the Russia-Saudi Arabia price war is to drive U.S. producers out of business. It might work to a certain degree. That playbook employed in 2014 with limited success. Now S-A is trying again with a weaker hand. You might end up with zombie companies like in 2014, where U.S. producers pump just enough to cover interests on the loan.
  • Mass bankruptcies look unlikely, at least in the short term. And if riskier companies can hold out until oil prices rebound, they are likely to be in a position to produce better cash flow next year. Oil futures a year out are projecting West Texas Intermediate crude at $33.
  • For companies to produce oil profitably, Brent needs to trade around $50 a barrel. Back in December, with the Brent at $60, companies with the right structure could thrive and  cover their dividends fully. Oil companies were buying back stock with excess cash flow. They could compete with the S&P 500 on a cash-flow-yield basis. Today the math doesn’t work at current prices.
  • I was surprised to learn that energy stocks now account for a measly 3% of the S&P 500 index, thanks to a terrible decade and massive technology companies. It’s much higher than that in Canada. I know it was at least a third of the index at one point but I don’t know if it’s still that high now.
  • Most oil and gas producers, including the majors, will lose money in 2020 or barely eke out a profit, and most of those still paying dividends will have to borrow to cover the cost.
  • They key for oil companies is reducing production, slashing costs, and conserving cash. These steps are likely to pay off in higher oil and gas prices over the next two years—and stronger operations and balance sheets for the industry’s survivors.
  • Royal Dutch Shell Plc. (RDS-A, RDS-B) cut their dividend for the first time since WWII, to 16 cents a quarter from 47 cents for a 66% cut. For a company that seems to want to be around for a long time, it’s the prudent move. Most companies, including Exxon, BP, and Chevron should cut but won’t. Instead they are delaying capital expenditure. You can only do that for so long before it bites you in the butt.
  • Take Exxon for example. Analysts think that Exxon will generate $2 billion of negative free cash flow this year, with a $15 billion dividend commitment. The company recently issued $18 billion of debt, which could cover this shortfall, but one could definitely question how long it makes sense to do so.
  • I think Shell is the most anti-oil oil producer. Shell is thinking about the long-term transition away from fossil fuels. Shell leads big oil in the race to invest in clean energy. Shell has this “Sky” scenario plan that highlights the transition toward a clean energy world by 2070. It’s much later than the U.N. 2050 plan and is probably more realistic. 
  • Everybody talks about the negative impact on U.S. producers. That Russia and Saudi Arabia are trying to drive them out of business and that Saudi Arabia wants to regain the crown of world’s largest producer. But there are other major global impacts that won’t go unnoticed. Low prices will hurt or destroy many countries dependent on oil. This can’t be good for enemies of the U.S. that are not under their political and/or military control, such as Venezuela and Iran (also Saudi-Arabia’s rival/enemy). This can’t be good for Russia also but I think they have enough foreign reserves to withstand the storm in the short term.
  • OPEC++++ agreed to cut production by nearly 10 million barrels a day, starting this month, to help to rebalance the market. I’m very skeptical it will work. First the math doesn’t work. For the near term, it’s too little, too late. The cuts agreed to are starting from a base level in October 2018, when OPEC was producing at a higher level, so the effective cut is more like 7.1 million barrels. Balance and supply is out of whack by way more than 10m a day. Second, if you look who the countries who signed the deal, how many of these countries can you trust? OPEC alone has had time keeping their members from cheating. The whole thing almost fell apart because of Mexico. This is not an easy agreement to implement. Here’s an headline: Iraq faces problems cutting 1 mln bpd of crude output -sources

Here’s an interesting take to wrap up things:


Bringing a Sledgehammer & Scalpel to a Fight

Part 1

Social isolation is playing defense. It’s a tool and it’s very effective. It’s the equivalent of taking a sledge hammer to a fight. It buys off time. The curve is starting to flatten in Italy and other parts of the world that have adopted social distancing measures. You can’t get infected if the virus doesn’t know where you are. But there is a problem. Social isolation is half of the battle. A battle has to be fought on multiple fronts. If you don’t know who has the virus, you can’t see where it is and where it isn’t. If you can’t see where it is, you don’t know how to fight it, except by shutting everything down and telling people to stay away from each other. In addition to a sledge hammer we now you need a scalpel. We need to get surgical. Testing in an outbreak gives you data. The data provides two functions. One is to diagnose those who are sick. The other is surveillance: to see where the virus may be lurking, especially in cases where symptoms are mild or don’t manifest at all.

Before we have a vaccine and a victory parade, we need massive testing. The key forward in this battle is testing, testing, and testing. We need to be aggressive on that front. That’s how we will know how wide spread the virus is. Test positive: Hide for fourteen days. Test negative: Go to work. The countries that have tested the most people are also the countries with a better handle on the virus. Why? Because they have data. South Korea and Singapore have been exemplar in their response. Italy is the “what not to do” example and the U.S. is providing serious competition for the title. In Italy the pandemic has turned into a disaster. Italy has only twice as many cases as Germany but almost 50 times the deaths. The Germans have tested huge numbers of people and the Italians have tested only people with serious symptoms. That is, some vast numbers of Italians has had the virus but were never tested, either because their symptoms never sent them running to the hospital or they never even knew they had it. In a matter of weeks (from February 21 to March 30), Italy went from the discovery of the first official Covid-19 case to 11,591 deaths. Within this very short time period, the country has been hit by nothing short of a tsunami of unprecedented force, punctuated by an incessant stream of deaths. This is the world’s biggest crisis since World War II.

We need mass testing for both the affected and the asymptomatic. Social distancing slows the disease to manageable level. That way we ensure hospitals have the equipment and resources they need. We’re going to need other kinds of testing, too, like serology — testing of people’s blood. That way, we can figure out who has already had the disease and is now immune and can safely return to be in contact with others in society. When that happens, we can move to a more sustainable mitigation strategy. Any sustainable strategy against Covid-19 has to balance public health and economics. It will need to be done in phases.  You can’t just turn on the economic faucet to full and nuke the health care system. Low risk and younger people will be able return to work. Gradually allow “nonessential” businesses to reopen (prioritize reopening in industries compatible with physical distancing first).

With aggressive wide spread testing we can start to go back to our normal lives, or a new normal, while savings lives. It’s not the case that everything could go back to normal. A new normal includes some level of social distancing measure in place with tracking and isolating cases.  No more handshakes and kisses. That’s over for a while.

Stay safe and thank you for reading,


Uncle Sam Wants You Home

Over the next couple days, I will publish a few posts on the current Covid-19 crisis. The first post is where I highlight some positive developments that deserve to see the light of day to keeps things in perspective.

Uncle Sam Wants You Home

At the time of this writing I’ve been ordered to shelter inside my home with my family because I’m fighting an invisible enemy called Covid-19. You too have been drafted in this war to stay home. Except for essential workers (which should be renamed brave workers), the most heroic thing I can do is stay home and watch TV. That’s how we are saving lives. Despite being in isolation for the last seventeen days, we are in this fight together, but not physically together, to prevent from killing each other. In theory, if everybody respected the rules for thirty days, the virus would be dead and we could declare victory. But that would be too easy. Yogi Berra said that “In theory there is no difference between theory and practice. In practice there is”. So practically speaking, the reason we are home is to slow down the spread of the novel coronavirus to avoid a public health care crisis.

Behavior has changed. You can tell just on walking down the street. A new etiquette manual is being rewritten as we go. People are keeping their physical distance. People are also making more of an effort with each other than I’d ever seen. Strangers are saying hello to each other. We now all have something in common. We all are in quarantine! And we talk about being stuck at home. I see people helping each other, especially the most vulnerable. I have a lot older neighbors that can’t go out in public and can’t believe the response they get from their neighbors willing to offer help. It’s fascinating how hard times bring people together.

The purpose of this post is to highlight some positive developments, current events, and a way forward.

I believe we will get out of this crisis sooner than later. I believe we will get out of this stronger. We are planting the seeds to combat the next epidemic. The world and the U.S. will never let this happen again. The world will adjust their response for the next crisis. They will treat this like a war. They need to be able to mobilize thousands of people and resources next time a threat is detected. We will be ready for Covid-20.

The Good News

We are flooded everyday with negatives news. It’s raining gold for the media industry. We can’t turn it off and the media is not turning off the tap. Covid-19 is a very sticky business for the media. Covid-19 is not only a lung killer, it goes after our brains. It activates a part of our brain call fear. Fear is more contagious than the virus itself. Fear is a powerful emotion that makes us act irrational. It makes human hoard toilet paper.

I want to shine some light on certain developments that might not see the light of day:

  • People are united in friendship and solidarity. People are coming together. We are in this together.
  • Not exactly grounded in hard science at the moment, but based on what we have seen warm weather might slow down the virus. It seems the droplet don’t travel as well in humidity. It will help us catch a break to get ready for the 2nd wave in the fall.
  • I’m optimistic that we will find a medical solution sooner than expected. The global medical research community might prove surprisingly resourceful. Everybody is focusing on this. From the medical community, companies from every sector, governments, and freelancers are pouring resources and time into solving this.
  • We were reminded of the importance of washing our hands. The soap goes after the fat shell around the virus and kills it. It’s very effective.
  • Because of the lack of testing, it was possible that a huge number of people have it now, or have had it, without really knowing it. There’s hidden community spread. The positive is that we are building some herd immunity. The means the virus will eventually slow it spreads because of the lack of targets. A screening at a Dutch hospital reveals surprising prevalence among hospital staff. Some 1,353 hospital staff were tested for the coronavirus. Of those, 86, or 6.4%, were positive. Barely half had a fever, and the majority reported working while they were mildly ill.
  • An F1 team, Mercedes, with the University of London, is building a new breathing aid. If trials go well for, it may be available in a week’s time.
  • Abbott has developed a 5-minute coronavirus test. It’s FDA approved under the Emergency Use Authorization. Abbott said in a statement that it plans to begin distributing the test next week and will ramp up manufacturing to 50,000 tests per day.
  • Bosch developed a test that gives you result in 2.5 hrs. What’s more, it allows a single sample to be tested not just for COVID-19 but also for nine other respiratory diseases, including influenza A and B, simultaneously.
  • A consortium of manufacturing companies is working to build ventilators.
  • The U.K. is sending coronavirus antibody tests to homes.
  • Oil prices are at a 17-year low. But it doesn’t matter because nobody is buying it.
  • I read their are about 35 companies and institutions racing to create a vaccine.
  • The first clinical trial for coronavirus vaccine began last week in the U.S. on 45 people.
  • People do recover. Around the world, many are recovering from the infection. Often this is thanks to the hard work of medical staff and the people who support them.
  • The environment is taking a break.

Even though we might not feel like it, we are heading in the right direction. Social distancing works. Better testing tools are coming. Everyday we are making progress. It will take time but we will win and come out of this stronger and better.

Thank you for reading,

Brian Langis

Win-Win: Idea for Reducing Cell Phone Bill

*Update: I wrote this two weeks ago. This morning the Liberals gave the big 3 wireless providers two years to cut prices by 25%. If they don’t comply the government will look into further increasing competition (hint: foreign companies).

During the last electoral campaign, Prime Minister Justin Trudeau made a promise to reduce cell phone bills by 25%. According to the Liberals this would save a family of four about $1000 per year on average. Part of the plan is to bring more competition to the table via mobile virtual network operators (MVNO). With the CRTC hearings underway, Canada’s Big Three, Bell, Telus, and Rogers are showing resistance. Telus said they would cut 5K jobs and $1 billion in spending if CRTC approves MVNO. The head of Rogers says it may have to cut back $3 billion on planned investment in technology networks, including 5G, this year if it doesn’t like the government’s new rules.

It’s safe to say that most mobile consumer wouldn’t mind the government shaking down big telecoms to lower bills but there’s a probably a long term cost, where Canada falls behind in innovation and technology. Telecoms provides critical infrastructure to the economy. It should be in the nation’s interest to have the best network. A lack of investment in the space could outweigh lower cell phone bills over time. The main question is how do we get lower bills and higher investments to fuel innovation?

Part of the answer is grant 5G spectrum for free or at a low cost in exchange for lower bills. Spectrum is the airwaves used to carry mobile phone and other electromagnetic signals. Spectrum is essential for companies to be able to grow, to provide data to consumers, to connect consumers. It’s what makes a smartphone smart. So this is a very valuable resource and how we deploy that resource will enable the ability for companies to invest and grow going forward.

The Canadian government is expected to auction wireless spectrum in 2020 and 2021, which could be a significant expense for wireless network operators. 5G is the next generation of wireless that is supposed to be better and faster. 5G will be fundamental in ushering our economy into the next generation (autonomous cars, smart cities, smart factories, IoT etc…) 5G will have a major impact on the next stage in the development of the digital economy.

For government, the spectrum auction is an opportunity to raise a lot of money. But do how to strike a balance between raising billions from a sector already straining to reduce costs while stimulating investment in the rapid deployment of 5G services. If the spectrum is too expensive, it becomes a way of taxing the industry instead of helping new technologies. It’s possible that high spectrum costs have a knock-on effect for consumer prices, which would reverse what the Liberals want to achieve.

This idea is not new. China has granted spectrum licenses to the country’s telecoms networks in rather than selling them off. It’s part of China’s attempts to win the 5G race and to have a national rollout of 5G. This is an opportunity for Canada to become a leader instead of playing catch up.

There’s a win for everyone. The Liberals fulfills an electoral promise. The consumer gets a lower bill. And the telecoms invest in infrastructure and innovation to provide access to the next wave of technology.

I understand it’s attractive for the government to auction off licences for potentially billions on an industry largely built on thin air. Instead of chasing quick money, I recommend playing the long game. We should approach this space with a large ambitious vision. Let’s think big here. Let’s be the model that other countries want to emulate.

Thank you for reading,


The Millennial Urban Lifestyle Is About to Get More Expensive

I like the statement below. The point is that the capital market are currently subsidizing your Uber ride. This works until it doesn’t. One day the capital markets won’t be as generous and Uber & company will be in a bind. The business model of looking outside for cheap money won’t work.  One of the biggest reason these companies are where they are is access to mountains of cheap cash built on a promise that one day you will be profitable one day. I have a serious question: If you can’t generate internal positive cash flow after so many years of growth, let’s say like Uber and Wework, how successful are you?

If you wake up on a Casper mattress, work out with a Peloton before breakfast, Uber to your desk at a WeWork, order DoorDash for lunch, take a Lyft home, and get dinner through Postmates, you’ve interacted with seven companies that will collectively lose nearly $14 billion this year. If you use Lime scooters to bop around the city, download Wag to walk your dog, and sign up for Blue Apron to make a meal, that’s three more brands that have never recorded a dime in earnings, or have seen their valuations fall by more than 50 percent.

Source: The Atlantic, The Millennial Urban Lifestyle Is About to Get More Expensive by Derek Thompson

Tesla, Ford, GM, and Fiat Chrysler

It’s hard to make sense of what’s happening in the stock market. There’s no simple explanation to why certain profitable companies can trade at 10x Price-Earnings (PE) or why money-losing companies are trading at 100x. The automobile industry is an example. There has been little appetite for traditional auto makers like GM and Ford. Tesla (TSLA) captures all the electric-vehicle (EV) enthusiasm. Tesla is trading at $930 a share, up 200% in a year and 121% less than two months in 2020.

Tesla chart vs GM Ford Fiat

Below is the market capitalization of some of the main auto manufacturers with total car sold in 2019:

  1. Toyota Motor: $196b, 10.7m cars
  2. Tesla: Market cap: $168b, 367,500 cars
  3. Volkswagen: $90b, 10.9m cars
  4. GM: $50b, 7.7m
  5. Honda Motor: $47b, 4.8m
  6. Ford: $32, 4.9m
  7. Fiat Chrysler: $26b, 4.3m


How has Tesla surpassed Volkswagen which sells 30 times more cars? How does Tesla’s valuation dwarfs the combined market value of Ford, General Motors, and Fiat Chrysler? Globally, the only competitor Tesla trails is Toyota Motor at $196b.

Of course profits, cash flow, and valuation are important. But in the short-term what matters the most is story telling. Tesla and Elon Musk are pushing are very interesting story: Tesla is the car of the future. They are revolutionizing the car industry and saving the planet along the way. Tesla’s cars are cool and high-tech. It’s a computer on wheels. They are a status symbol. Now compare that story to Ford’s “have you driven a Ford lately?” (I have no clue if that’s still their thing). The point is one car company are making investors excited and the others are not.

The belief in Tesla is cult like. You can throw anything at Tesla and the stock just keeps going up. Just last week there has been a car recall, a SEC subpoena, $2b of new shares issued, explosion in warranty expenses, and yet the market doesn’t care. That’s on the top of losing over $700m in 2019. The SEC revelation, that alone, can spook investors. They check up on company accounting and financial practices and nobody seems to care.

The value of a stock is based on future expectations. In this case, the market believes that Tesla will become the biggest and most profitable car company in the world. Over the long term, the expectation is that revenue growth will translate into growth in profits and free cash flow. The value of any investment is the present value of future free cash flows. The market also believe that Tesla’s rise reflects investor expectations that the company will remain at the cutting edge of technological change in the auto industry.

It’s important to note that growth does not always create value. A company can grow, but if it doesn’t earn above the cost of capital, that growth destroys value. In order for growth to create value, a company must earn returns above its cost of capital.


What’s going on with Ford? It hasn’t been an easy year or five years for Ford. The stock has been an absolute dog for years despite seeing their trucks everywhere. The F-series is one the best selling vehicle every year. They are nice. They are a symbol. They are fun. And they are expensive and very profitable. The upcoming Bronco has a nice buzz around it and the Mustang Mach-E has a big reservation list. Still none of that seems to matter. The stock is around $8, half of what they were a couple years ago. It has a juicy dividend of 7.4%. But…the most important question is will they cut it? The current dividend commitment is $2.4 billion annually and guided $2.4-$3.4b for 2020 in free cash flow. Ford does have a strong balance sheet with a cash position of $22 billion and its liquidity, which includes lines of credit, totaled about $35 billion. Ford has to fund the dividend, its capital plan and a restructuring.

They are in a $11b turnaround that never seems to end. Ford disappointed investors with its earnings and guidance.The current CEO seems to be on the right path despite the never ending issues. He adopted the playbook that other companies, like GM and Fiat Chrysler, are now using which is a larger focus on profitably vs market share. These companies were trying to be everything for everyone and it’s not working.

The car industry is changing fast and Ford is in the middle of that struggle. The last five years hasn’t been good for Ford. The main question is what will the next five be like?


There’s no love for GM. The story here is that GM is an old traditional auto maker, not one that is taking a plunge in the future.

Every year the stock seems to get cheaper on an earning basis, but cash flow ultimately came up short for one reason or another. GM trades for less than 6 times estimated 2020 earnings and Ford sells for 7 times. The comparable figure for Tesla stock is about 88 times. Is 2020 the year for GM?

GM does have a plan for an all-electric future featuring leading-edge autonomous-driving technology with their Cruise division (valued at $19b alone but that’s because of Softbank’s investment, so they probably paid too much like everything else). GM is saying the right things by addressing climate change and decarbonization.

The market gives little credit to the huge amount of cash GM generates. For 2020, it forecast almost $7 billion of free cash flow. At that level, GM stock, trading at $35, would have a free-cash-flow yield of almost 13% (vs the S&P 500 index’s FCF yield is about 3.7% and Toyota of 0.8%).

Something needs to happen. The stock hasn’t done anything since its IPO except the nice dividend of 4.3%. Nevertheless I’m confident in GM.

Fiat Chrysler

I don’t have much to say on Fiat Chrysler (FCAU). It’s a favorite for certain part of the value investing community. I know Mohnish Pabrai likes it a lot was an important holding of his for years. I think Sergio Marchionne was a good CEO. He was focused on capital allocation and has a famous presentation on the topic: FCA Presentation – Confessions of a Capital Junkie. Basically the message was the industry has not earned its cost of capital over a cycle and consolidation is the answer. Which explains why he was always trying to sell itself to GM, Ford, and whoever was interested, which confuses me. Spin this, buy that, sell that, split this etc…they are not mergin in Peugeot. Will Americans buy French cars? Peugeot and Fiat trade for just 5.8 times and 4.9 times estimated 2020 earnings because nobody cares.

Car operating profits
Sergio wouldn’t be happy with these numbers.

Fiat Chrysler has some good brands. I think the RAM and Jeep are strong and could be stand alone. But the main problem with Fiat is that they are behind in the EV game and R&D. They are behind in playing catch up.

Charlie Munger DJCO – Los Angeles – Homeless

I’m currently on the road to L.A. and going to San Diego. I want to thanks the new followers to the blog. I recently got a “surge” in traffic and new followers despite not posting anything new in a couple weeks. Thank you for following.

Charlie Munger

I attended the Charlie Munger Daily Journal AGM. It was a good one. They even had breakfast this year. Not sure if it was Peter Kaufman or Charlie’s idea to put up with the bill. The number of attendees is growing every year which explains the change of location. This year’s location was in a conference room attached to at the Cathedral Plaza in downtown L.A. This plays well with the cult behavior of the people following Charlie Munger because they are definitely not there for the Daily Journal yearly update. I don’t minimize the impact of cult like behavior. People flew from all over the world, mostly China, to hear him talk, even though it’s broadcast online. Some people can’t ask him a question without a one minute opener on how much they love the guy.

Charlie is 96 years old. I found him to be in better shape than he was two years ago last time I saw him. He was steady and solid throughout the two hour meeting.  It’s too bad that he doesn’t stick around after the meeting anymore. The meeting is way too big now. A couple years ago he used to linger around a little longer after the official portion of the meeting was over and field all kind of questions. The best part was that he was unfiltered. People are a little bit looser when you know you are not on camera. But with cells phones these days, you are constantly being watched. You can find some of the old videos of the after-meeting circulating on Youtube. I don’t think Munger wanted this to be online for the world to see. Despite the recordings being enjoyable, that was also the last time he did it. Anyway that would be impossible to do today, the meeting is way too big.

Regarding Munger’s wisdom, there was nothing you didn’t already know. It’s like going to church. You know what is going to be said. It’s just good to hear it again. It’s re-centers you.  Munger talks about rationality, expectations, circle of competence, and of course a good meeting is never completed without an Elon Musk joke.

I’m currently on the road. I wish I could elaborate with notes and everything. But everything is already online.

The best part of these meetings is regrouping with some value investor friends. I also took the occasion to have dinner with insurance investors to pick their brain.

Los Angeles

It’s my second time in the city and realized I’ve barely seen the city. Everything I’ve done is around three city block in downtown L.A. I wish I had an extra day just to be a tourist to dig into everything L.A. has to offer.

L.A. is a weird city. It’s basically a bunch of boroughs looking for a city. It’s sprawled out in every direction. You can lose two hours just going from one neighborhood to another. People identified themselves with their borough. Normally a big city has a downtown. That downtown becomes the center of gravity. That’s where things are happening. That’s where people want to go. Except for L.A. It was built differently and it grew very rapidly. L.A. does have a nice downtown that is recently “renovated”. You can hangout downtown now but I don’t think people live here. Basically if you visit L.A., you don’t spend a lot of time downtown. You go to the different boroughs, like Hollywood.


Any major city has a homeless problem. L.A.’s homeless situation is a major homeless problem. I almost crushed one walking because he was the same color as the sidewalk. It was a last minute miss. I heard about the L.A. homeless problem in the news. But when you see it with your own eyes it really hits you. It’s really bad. It has moved from big city “inconvenience” to its society’s problem. Everybody is affected by this. It’s everybody’s problem.  The sidewalks are covered with tents. They are micro communities inside a community. I saw a guy with a broom dusting the sidewalk in front of his tent. Another one seriously working out. Some of these tents are actually pretty nice.

I don’t know what the solution is. It’s easy to point out the problem. It’s much harder to solve it. My guess is the majority of the homeless can be helped. They don’t want to be on the street. There’s also a minority of homeless that have serious mental issues. They need serious help. This is a community problem, a city problem, a state problem, a national problem, a global problem. It’s not a “other people problem”. It’s our problem. The homeless situation seems to have gotten worse since last time I was here in 2018. I don’t think it’s going in the right direction. Why so homeless many in L.A.? Look at it this way. If I was homeless, I would also be in L.A. also. Everybody wants to be in California. There are just too many people here.

What can we do? It’s a WE. We need to come together and work on solutions. They just can’t move. If it’s a drug problem, we can help. If it’s a health problem, we can help. If it’s a job problem, we can help. Can we build a mega social housing complex with running water and electricity? The solution can then be applied to other cities. It’s not easy, but sometimes a problem can be turned into a positive. It’s the old saying, in a crisis there are opportunities. Munger talks about when you inverting the problem to solve it. Invert, always invert.

San Diego

As I’m writing this I’m on my way towards San Diego. I’m taking the Amtrak train down and I heard it’s one of the nicest scenery train ride in the U.S. So far so good.

Tesla Cybertruck Questions

Cybertruck drawingIt took me 24 hours to like it. First came the shock, then acceptance, then waking up to wanting one. When somebody does something different there’s usually a strong reaction to it. Trucks are trucks and truck lovers are one fanatic group. The Cybertruck is not for everyone. To me it’s the modern day version of a green Hummer. And if you haven’t seen, the truck launch was must-see TV. Great marketing coup.

A EV truck is a step in the right direction. Look aside, the Cybertruck has a lot of room. There is more room in EV because there is no internal combustion engine taking up space. The batteries in an EV are typically in the floor. That’s one positive for EVs that consumers might not typically consider. GM and Ford are coming out with a EV truck soon. Rivian, a EV truck maker, is one coming out too (I think they are 50% owned by Ford but not sure).

I would like one but I’m not there yet. There are some unanswered questions. You won’t find me put a $100 to be on the reserve list. I want to wait a while to see how things play out. I’m that way with everything. First generation of anything is usually buggy. Let the fanboys find imperfections. Look at Ford and GM, they have been making trucks for decades and they are far from perfect.

The analysis in me comes out and start to question everything. Why can’t I leave it alone and just enjoy the show? Here are some of my concerns.

  • Is the Cybertruck even road certified? It seems so far to be one of Musk’s pet projects. There are a few safety concerns.
  • Where are the mirrors? I though the law required mirrors.
  • Same thing with the door handles. I think you need handles on the outside in case people are trap inside. (I know this because one of my first cars didn’t have a handle on one of the back door and I needed to fix it to have it road certified.)
  • Same goes with the not so bulletproof windows.
  • Musk made much of the Cybertruck cold-rolled stainless steel body. The steel body that won’t bend is a cool feature but isn’t that more dangerous then soft body? Today’s cars are super soft but very safe. During an impact it’s the car that takes the damage, not the passengers. Back in the good old days, two cars made of steel would slam into each other and barely have a scratch but the people inside would be dead.
  • Stainless steel is heavier than aluminium and than carbon fibre. Don’t you want the vehicle to be lighter? You already have super heavy batteries.
  • Stainless steel requires a lot more care than a coat of paint. How do you repair it?
  • Tesla’s finance are shaky. Tesla is burning a lot of cash. It’s current financial position doesn’t radiate confidence. A whole post could be dedicated to Tesla’s financials. Some analysts believes the stock is a $0, others think will go up 10x.
  • Production is expected to start in late 2021. If we learned anything from Tesla, it will be delayed.
  • Towing is important for truck people. Tesla’s base warranty doesn’t cover deep water, presumably because of the battery packs. Many people with boats know launching the craft requires backing into water.
  • Maybe Tesla is not going after the hardcore truck people. Maybe the appeal is to “influencer crowd” like celebrities and the “look at me” crowd. The Cybertruck might be the Hummer for the green millennial generation, a virtue and vice signaling machine. Plus most truck owners don’t use their truck for trucking. The truck is on asphalt 99.9% of the time.
  • The Cybertruck lacks aerodynamics because stainless steel is hard to work with. This can’t be good for mileage.
  • The price points seem too low considering all the promises. The price points seems to be around the same as a Model 3. The stainless steel is expensive to produce. The amount of batteries it will take is not cheap. Is this going to be a profitable vehicle or a market share grabber?
  • How much is it going to cost to get this venture going? How many millions, or billions, will it cost to get this new and costly manufacturing processes? What’s the return on investment on this R&D, factories, and tooling equipment required for the truck? Are they going to build a new tent?
  • The stainless steel unibody limits the Cybertruck to a highly capable 6-seater pickup and nothing else.
  • The biggest disadvantage for a unibody design is customization. With a traditional body on frame design, a manufacturer can build anything that a customer wants. It can make it a single/double cab, or a long/medium/short bed. An F-Series can be a two-wheel drive F-150 that can only tow 7,500 lbs or a Super Duty F-450 that can tow north of 30,000 lbs. The Cybertruck can’t be customized in any such way without redesigning the entire chassis for each application.

I will wait. There are too many unknowns here. Musk has a history of over-promising or let’s just call it like it is — complete fabrication. On the other hand, it’s good to have a strong vision and to aim for the sky, or space in his case. After all this is a guy who started a EV car company from scratch and is sending rockets in spaces. But you also need to be careful. Let’s wait for the “finish” product.

Early results show Cybertruck might have wider appeal than many predicted. To be continued….


Aramco, the state-owned oil giant is seeking to raise between $24B and $25.6B by selling a 1.5% stake.

Valuation is an art and not a science…how does a valuation estimate have a $1 trillion range! Bank of America put the valuation of Aramco at $1.22 trillion as a low case scenario and $2.27 trillion as a high case…a huge gap that’s more than enough to fit the combined market capitalizations of Exxon Mobil, Royal Dutch Shell and Chevron, the world’s three largest publicly listed energy companies. French bank BNP Paribas said it’s worth exactly $1.424394 trillion…

I see what’s going on here. Saudi Crown Prince Mohammed bin Salman strongly believes that it is worth $2 trillion and it’s generally not a good idea to disagree with him. You can without sacrificing too much of your integrity say “we think it is worth between $1.22 trillion and $2.27 trillion” or whatever. Then if it turns out to be worth $1.22 trillion you can say you were right (it was in your range!), while you can also tell the prince that you agreed with and supported his valuation (also in your range!).

I’m also wondering where is the upside? How do you go from $2 trillion to $4 trillion? I see a lot of risk in this investment. They are having a hard time getting foreign institutions on board. Aramco has struggled to attract a major cornerstone or anchor investor. It has been written they are getting local billionaires to back it. The fact that they are getting listed on the local stock exchange instead of New-York or London is not helping. I can list a laundry list of issues they have to address before submitting any paperwork in the U.S.

You can read the prospectus here.