Kamala Harris Leaves Iowa With A Promise To Keep Getting Better

DES MOINES, Iowa ― “Can you tell me your mother’s name?” Sen. Kamala Harris (D-Calif.) asked from across the table.

The woman she was speaking to, Monica Reyes, a 28-year-old with DACA status, had traveled to the Iowa Capitol on a blustery Saturday morning in February to let the senator know how much her immigrant mother had done for her growing up. And now Reyes wanted to know what the senator could do for people like her mother if Harris is elected president.

Harris would eventually give Reyes her position on the matter, criticizing the Trump administration for “trying to create a scapegoat” out of Mexicans and reiterating her support for comprehensive immigration reform, Deferred Action for Childhood Arrivals (DACA) and Deferred Action for Parents of Americans and Lawful Permanent Residents (DAPA).

But before she did that, she wanted to know the name of Reyes’ mother. It’s Brenda, Reyes said.

“I think it’s important,” Harris replied, “that we speak her name.

“Her story is the story of so many people, and I applaud her.”

Sen. Kamala Harris is positioning herself more as a common-sense fighter, but her trip in Iowa made clear that voters are sti

Sen. Kamala Harris is positioning herself more as a common-sense fighter, but her trip in Iowa made clear that voters are still expecting their candidates to have detailed policy ideas and know the issues inside and out. 

The audience applauded as well. Over the course of her first full-on tour around Iowa this weekend, Harris’ ability to boil such political moments down to the personal garnered many of her largest cheers. The next day in Bettendorf, she spoke about the pain of watching her mother battle colon cancer before she died in 2009. “It requires physical strength, emotional strength, mental strength, but what that should not require of anyone is that you also have to figure out how you’re going to pay those medical bills,” she said to loud applause.  

Dan Audi, a 54-year-old maintenance supervisor who is considering Harris, Sen. Sherrod Brown (Ohio) and Sen. Amy Klobuchar (Minn.), said after the Bettendorf event that he appreciated Harris’ “positive, happy persona.”

“You can be a fighter without being angry,” he added.

But after the previous morning’s event, Reyes said, she couldn’t help feeling that Harris’ answer fell short. The former California attorney general is positioning herself more as a common-sense fighter, sans the wonkiness of Sen. Elizabeth Warren (Mass.), but her trip in Iowa made clear that voters are still expecting their candidates to have detailed policy ideas and know the issues inside and out. 

“I felt like she maybe needs to know a little more about the current and past policies on immigration to be able to better answer the question that I gave her,” said Reyes, a co-founder of the immigration advocacy group Dream Iowa, as Harris stood nearby. “Not just her but all of the presidential candidates.”

Iowans have long taken their responsibility seriously as the first state to hold a Democratic nominating contest every presidential electionElementary schools teach children about the complicated caucus process, instilling in many of them a sense of democratic duty, said Sean Bagniewski, the chairman of the Polk County Democrats.

“It is ingrained in you, as an Iowan, that one of your roles in America is to vet and screen and vote for presidential candidates,” he said.

But a year out from the 2020 Iowa caucuses, many feel an even higher sense of obligation to make sure they put the correct candidate on track in the presidential primaries, peppering candidates — including Harris, Warren and Sen. Kirsten Gillibrand (N.Y.) — with questions that can border on the uncomfortable. 

“The whole country is depending on us to have smart, wide-open conversations,” said Sue Dvorsky, a former Iowa Democratic Party chair.

Regardless of the various shifts in the primary process, the state’s influence remains indisputable. Every Democrat to take first in Iowa has gone on to win the primaries after 1992, when an Iowa native, Tom Harkin, bested an Arkansas governor named Bill Clinton at the caucuses. The stakes are also more than clear with a wide-open Democratic field and growing ideological fissures in the party, not to mention President Donald Trump.

Democrats around Iowa appear to understand the urgency of the moment as well. Bagniewski said he recently helped set up a last-minute event for another presidential candidate, Gillibrand, and 50 to 60 people were expected to attend, but about 300 showed up.

Harris in Ankeny, Feb. 23. Early polls of likely Iowa caucusgoers have placed her in the top tier with former Vice

Harris in Ankeny, Feb. 23. Early polls of likely Iowa caucusgoers have placed her in the top tier with former Vice President Joe Biden and Sen. Bernie Sanders (I-Vt.).

This weekend, it was Harris’ turn to cycle through Iowa, and crowds once again turned out in droves for her first full tour around the state. According to one of her aides, 760 people braved the cold to watch her speak in Ankeny on Saturday ― so many that the organizers had to rush out more chairs as the event began. The next day, 750 showed up in freezing temperatures to watch her speak in Bettendorf. Early polls of likely Iowa caucusgoers have placed her far ahead of Gillibrand and roughly in the top tier with former Vice President Joe Biden and Sen. Bernie Sanders (I-Vt.). Some who attended the events, like 20-year-old Jordan Milligan of Upper Iowa University, have already decided Harris is their candidate.

“She’s the one,” he said.

But many other attendees were undecided, there more to vet than to cheer. That even included some who attended the gatherings in Harris T-shirts, like Justin Comstock, a self-employed 43-year-old who said he was “window shopping” last Saturday.

“I’m coming into it with an open mind and expecting to see if the hype’s there or not,” said Comstock, who said he’s also intrigued by Klobuchar.

“We’ll probably go see everyone,” said Jim Woods, 67,  who spent 25 years at the Davenport Fire Department before becoming a teacher. “This is Iowa. They just come through.”

As much as Iowa Democrats have high expectations of themselves to pick the right contender, they expect even more of their candidates. Like Reyes, many Iowans take pride in their willingness to ask tough questions, said Jeff Link, one of the state’s top Democratic strategists. That isn’t exactly new. He still remembers riding around the state with then–Vice President Al Gore as his state director during the 2000 presidential election. “It was just mind-boggling the kinds of questions he would get,” Link said. “They’re not just going to ask about corn.”

Ammertte Deibert, 70, of Ames, Iowa, jots down notes as she listens to Harris, former Colorado Gov. John Hickenlooper and for

Ammertte Deibert, 70, of Ames, Iowa, jots down notes as she listens to Harris, former Colorado Gov. John Hickenlooper and former HUD Secretary Julián Castro at the Story County Democrats Soup Supper on Feb. 23.

Some of the questions thrown at Harris were light, like the man in Ankeny who preceded his question by telling her he also puts hot sauce on his greens, and she received loud applause for her shots at Trump (“The first thing is to not conduct trade policy through tweets,” goes one well-practiced line) and for toeing the Democratic line by pushing for universal background checks for gun sales, free college, “Medicare for all” and her proposed LIFT Act, which would hand middle-class households up to $500 per month.

But over the course of the weekend, she also fielded pointed questions on topics such as Puerto Rico, agricultural technology, foreign policy and the environment. In Ankeny, a young man asked whether she would support abolishing the Senate filibuster, adding, “Just give me a really articulated defense on wherever you come down on that issue.”

“That’s a great question!” Harris replied, before joking, “Let’s change the subject!” (She then said she felt conflicted on the issue.)

In Bettendorf, a man in the crowd wanted to know where she stood on Israeli-Palestinian relations and whether she would release off-the-record comments she made to the American Israel Public Affairs Committee last year. When she didn’t answer the AIPAC part of the question, he yelled it out again, leading her to say, “Sure,” while the microphone was away from her mouth. (Her team later released a transcript to HuffPost.)

Even an opening question from a young girl named Nora, who was sporting a “Future president” T-shirt, proved far from a softball, as she asked Harris how she would deal with the $22 trillion national debt. “It’s like not being invited to a birthday party but still having to bring a gift,” the young woman said.

The last time Harris touched down in Iowa, in January, one of her answers to a question led to a small national controversy, when she suggested at a CNN town hall that she supported eliminating private health insurance. (A spokesperson said a day later that she is open to more moderate health insurance fixes as well.) This time around, she impressed many of the people who spoke to HuffPost.

“She’s done her homework,” said Mary Campos, 89, a co-president of the Brown and Black Presidential Forum. “She’s ready to answer questions.”

Richard Lynch, 51, said he supported Sanders in 2016. While he said that Harris “sidestepped” some of the questions she was asked, he added that he welcomed all candidates moving into Sanders’ space. Asked if he believed Harris had done that, he cited her support of “Medicare for all,” saying, “It sounds to me like the answer is, yes, she’s moving into the space he created, and frankly, I’m not sure it should be his space, per se.”

Harris greets people in Ankeny, Feb. 23. Many Iowans feel a sense of obligation to make sure they put the correct candid

Harris greets people in Ankeny, Feb. 23. Many Iowans feel a sense of obligation to make sure they put the correct candidate on track in the presidential primaries.

Ed Fallon, an Iowa talk show host and the director of the environmental organization Bold Iowa, said he wished Harris had organized smaller events, where people could have even more time one-on-one time with her.

“That’s great when a candidate can draw that big of a crowd, but it’s good to try and organize smaller opportunities as well,” he said, “where you can look them in the eye and dialogue with them directly about where they stand about things that you care about.”

“So far, I haven’t had that experience with Harris,” he said. “Hopefully that changes.”

Blizzardlike conditions forced the Harris campaign to cancel two smaller events Sunday morning in Waterloo, Iowa ― a stop at a coffee shop and a meet-and-greet at a Baptist church ― but after most of her events last weekend, the senator stayed around to take questions and pose for photos.

That included her discussion Saturday at the Capitol, where Harris spoke for a few moments with Reyes, who had asked the question about immigration. Reyes told the senator that she felt her answer focused too much on DACA and DAPA, which deal with only a fraction of the undocumented population. Reyes said she hoped Harris would be more inclusive.

“She, at the end, was like, ‘You know, I understand, and I’ll do better at that in the future,’” Reyes said.

Reyes isn’t a mind reader, she said, so she can only hope Harris was being honest. 

A Cheat Sheet To Avoid Stock Market Ruin

In his latest book, Skin in the Game, Nassim Taleb runs an interesting thought experiment where he talks about two cases of playing the casino.

Equate the first case with ‘stock market trading’ in general –

…one hundred people go to a casino to gamble a certain set amount each over a set period of time, and have complimentary gin and tonic. Some may lose, some may win, and we can infer at the end of the day what the “edge” is, that is, calculate the returns simply by counting the money left in the wallets of the people who return. We can thus figure out if the casino is properly pricing the odds.

Now assume that gambler number 28 goes bust. Will gambler number 29 be affected? No.

You can safely calculate, from your sample, that about 1 percent of the gamblers will go bust. And if you keep playing and playing, you will be expected to have about the same ratio, 1 percent of gamblers going bust, on average, over that same time window.

Now consider the second case in the thought experiment. Equate this with an ‘individual’ trading the stock market –

One person, your cousin…goes to the casino a hundred days in a row, starting with a set amount. On day 28, your cousin is bust. Will there be day 29? No…there is ‘no game no more.’

No matter how good or alert your cousin is, you can safely calculate that he has a 100 percent probability of eventually going bust. The probabilities of success from a collection of people do not apply to your cousin.

Now, you may blame the disastrous outcome of your cousin on, well, your cousin. He may have been foolish, you may think, who did not understand that the longer you play in a casino the more you stand to lose (the house always wins).

But what Taleb writes about is a nice mental model to remember when you are reading finance books or are being recommended stocks based on the long-term returns of the market. How your cousin behaved in the above thought experiment is how most people, old or new, behave in the stock market when they play the game as if it were a casino (trading, speculating, etc.).

Remember that you or me are not the market. Earning the long-term returns of the market, of the past or the future, is not in our control. Managing our risks and avoiding ruin, mostly is.

“Rationality is avoidance of systemic ruin,” Taleb writes.

Trying to avoid the ruin the stock market system enforces upon people who disregard its workings is rational. Believing that you can beat the system at it, by playing the game mindlessly, isn’t.

Someone wise once said –

People destroy themselves in unique interesting ways. Systems destroy people in uniform boring ways.

Now the problem with beating the system for some time is that we get a swelled head. We start believing that if the stock we have invested in has earned us magnificent returns over the past 2-3 months or years, it was entirely an element of our skill and no luck. Yes, that’s how the mind behaves and makes us believe.

But then, as Jesse Livermore, one of the world’s best speculators, who committed suicide after going bankrupt the fourth time, reminds us –

A great many smashes by brilliant men can be traced directly to the swelled head — an expensive disease everywhere to everybody, but particularly…to a speculator.

Now, if that’s not all, consider path dependence that in simple terms explains how history really matters – where we have been in the past determines where we currently are and where we can go in future.

As Taleb writes in Skin in the Game

Assume that your capital is around one million dollars and you are involved in speculation. Apply path dependence to the reasoning.

Making a million dollars first, then losing it, is markedly different from losing a million dollars first then making it.

The first path (make-lose) leaves you intact; the second (lose) makes you bankrupt, insolvent, maimed, traumatized and more generally unable to stay in the game, thus unable to benefit from the second part of the sequence. There is no ‘make’ after the ‘lose.’

Anyways, ultimately, the lessons?

First, you are not the market. So, stop looking at market returns. Don’t yield into the false promise that “in the long term, you will earn a minimum of 15% because that’s what the market has earned in the past.”

Second, don’t speculate, again because you are not the market made up of people who may seem to be doing well (for some time) speculating. Also, stocks are pieces of underlying businesses. Respect that and you have a great chance of doing well over the long run. Remember Warren Buffett who said – “If you’re even a slightly above average investor who spends less than you earn, over a lifetime you cannot help but get very wealthy – if you’re patient.”

Third, if you really wish to speculate (but never with other people’s money), first earn at least a million (through hard work at your place of work, and investing) and then speculate with a small part of it so that you don’t end up in total ruin. Call this money you use for speculation as ‘sin money,’ so that mentally prohibits you from committing a lot of sins. Remember that smoking a single cigarette, like speculating just once and with a small amount of money, is benign. But their constant repetition (“just one more time”) takes you closer towards ruin.

Fourth, the only way to do well in investing is to survive. As Peter Bernstein writes in his brilliant book Against the Gods“Survival is the only road to riches. Let me say that again: Survival is the only road to riches.”

In life and investing, I wish you survival.

Because if you survive, you will be rich, my friend.

The post A Cheat Sheet To Avoid Stock Market Ruin appeared first on Safal Niveshak.

Learn from our nightmare: tips to prevent getting hacked

Here at Version One, we had two nightmarish weekends in early February when our accounts were hacked by pretty sophisticated and aggressive hackers. As we’ve since learned, hackers love weekends, because it’s a time when targets may not realize the hack right away and the customer service at service providers is limited. But thanks to very immediate help from Google, Twitter and other organizations, we were able to regain control of our accounts pretty quickly.

Through the process, we’ve learned quite a bit about safeguards to prevent these kinds of hacks from happening – and here are some key lessons that everybody should take to heart:

  1. Do NOT use 2fa (two-factor authentication) with text messages. Our experience has shown that there is really no safe way to protect your phone number from a SIM swap attack and it happens all the time. Some of the most aggressive hackers use fake documentation to pretend to be you and neither the tech nor the customer service at mobile carriers is currently very well set up to prevent such fraud. Once hackers have control of your phone, they can use the recover password process to take over the account. If you take away just one piece of advice from this blog post, it should be “Do NOT use 2fa with text messages – remove your phone number from any recovery mechanism” 🙂   
  2. While you are eliminating a big piece of risk by not using text messages as a 2fa method, you should still protect your mobile carrier account: please put a PIN on your account plus a lock, if your carrier offers that option.
  3. Use an authenticator app wherever you can. Services will offer ‘backup codes’ in case you don’t have access to your authenticator app. Write them down or print them, then store them in a safe place (ideally, a safety deposit box). In addition to these steps, you can also get a physical dongle/key like Yubikey or Google Titan.
  4. Follow these steps for all of your key accounts: email, Facebook, Twitter, Dropbox, bank accounts, PayPal, domain registrars, etc. As we found out, domain registrars are actually a dangerous point of attack: if a hacker is able to take over the account (again with 2fa and text messages), he/she can change the email records and suddenly have control of all incoming emails without having to hack into your Gmail.
  5. Use a password manager like 1password or Dashlane. There have been so many hacks of large sites out there, that there is a chance that hackers have access to your email and a password that you have been using on one of those sites. Given that we all have used the same / similar password on other sites, you are at risk of getting hacked.
  6. Use the opportunity of setting up your passport manager to change all of your passwords for all of your accounts.
  7. Take a minute to delete accounts that you no longer use, but might have sensitive information.
  8. On the topic of passwords, we also recommend not storing your passwords in Google Chrome. If your Gmail account gets hacked, you immediately give the hacker access to all of your accounts (even with the option to export this data and use this data at a later stage).
  9. Consider making your primary phone number private and giving out an alias number with services like Google Voice (which works in the US)
  10. And for those of you who use Google Suite (or a similar service), make sure that your public accounts / email addresses do not have super/admin privileges. You can create an admin account like private@yourdomain.com and then make yourname@yourdomain.com a “regular” user. That’s because if hackers get a hold of an admin account, they can lock out everyone else related to you and your org.

And the last piece of advice you should take away from this blog post: don’t just read it but reserve a few hours today or tomorrow to actually do these things. Believe us, it is a very good investment 🙂

P.S.: Funnily enough, we recently invested in a company that provides managed security for small- and medium-sized companies that cannot afford a full-time security expert on staff but want to get ahead of any potential attacks on their software / network. We will be able to share more about this company in the upcoming weeks and months but this attack has certainly confirmed our investment thesis.


The post Learn from our nightmare: tips to prevent getting hacked appeared first on Version One.

Facebook Secretly Talking with Bitcoin Exchanges about WhatsApp Crypto

Facebook’s blockchain team has made a significant amount of progress on its secretive cryptocurrency project since Bloomberg first reported that the company was building a dollar-pegged stablecoin. So much progress, in fact, that you may soon find the WhatsApp-focused cryptocurrency listed on a bitcoin exchange near you.

Facebook Has Already Met with Bitcoin Exchanges to Discuss its WhatsApp Token

According to The New York Times, Facebook has already quietly met with multiple bitcoin exchanges to discuss using their platforms to issue the token to consumers.

From the report, which was authored by Nathaniel Popper and Mike Isaac:

“The Facebook project is far enough along that the social networking giant has held conversations with cryptocurrency exchanges about selling the Facebook coin to consumers, said four people briefed on the negotiations.”

Confirming previous reports, Popper and Isaac cite five anonymous sources who say that the cryptocurrency will be integrated directly into WhatsApp, which had more than 1.5 billion monthly active users as of December 2017.

whatsapp monthly userswhatsapp monthly users

WhatsApp’s 1.5 billion active users could soon have access to Facebook’s cryptocurrency. | Source: Statista

Given that Facebook already announced plans to unite the back-end system that runs WhatsApp, Instagram, and Messenger, the cryptocurrency could soon be available to as many as 2.7 billion consumers – roughly 35 percent of the world’s population.

The cryptocurrency would be pegged to the value of the US dollar, providing users with an easy – and cheap – way to send money across international borders.

Alongside its cryptocurrency – which has not been confirmed publicly – CEO Mark Zuckerberg has said that the company might use blockchain technology to overhaul its identity and data-sharing systems.

Facebook Goes to Great Lengths to Keep Crypto Efforts Secret

Facebook’s crypto division has already made at least one acquisition, smart contract development firm Chainspace. The Information reports that the company also met with Algorand, Keybase, and the now-shuttered stablecoin project Basis.

Including the former Chainspace employees, Facebook’s cryptocurrency division now has more than 50 dedicated engineers. The project is led by David Marcus, a former president of PayPal who more recently led the company’s Messenger team. Notably, he also sat on the board of US crypto exchange giant Coinbase before resigning around the same time he took control of the social media giant’s blockchain efforts.

Marcus and Facebook are keeping a tight lid on the operation. Per The New York Times, the crypto engineers are sequestered in an office inaccessible to other company employees.

CCN reached out to Facebook for comment and will update this article upon receiving a reply.

Hyflux: I could probably see the structural weakness but probably not when things would blow up

I don’t have a lot of friends I know who invested in the Hyflux Cumulative Perpetual Preferred Shares (CPS) or the Hyflux Perpetual Bond. That is because they tend not to be investors in the first place. 

I do have fellow bloggers or investing friends that I am acquainted with, that are caught in this. 

You can say that you have taken the proper portfolio risk management actions by not making either the Hyflux CPS or the Perpetual Bond a large part of your portfolio, but it absolutely sucks to know that you might lose 100% of this.

I notice that a lot of folks have put out various pieces on this, telling people you ought to see this coming. 

My feel about this is that, I did not pay attention to Hyflux and the related stuff but my friend have been computing the mathematics behind the CPS and the perpetual bonds because the yields are very attractive.

What made them so attractive is that 

  1. the duration that they might be call back by Hyflux is very very short, and this might be a very good special situation
  2. if they are able to sell of their main “asset” in Tuaspring, they could use this to call back the perpetual bond and the CPS
  3. if they do not call back, the coupon for both after the call dates (2018 and 2020) would be bumped up

I was busy during this period so I didn’t run the numbers. 

However, I find it a bit disrespectful to say you could have easily seen this coming. Disrespectful because I think those that some of my friends that, or those in social media that are invested, are not stupid, are rather competent and have critically think through, balancing the probability of default, seniority and the probability of Hyflux able to get liquidity by selling of their assets.

You just have to hop over to Valuebuddies and you could see some good discussions then.

I want my piece to tackle my insecurity whether, if I were to be more free, if I pay attention to my friend a bit, would I get caught in this whirlwind. 

And I think this is worth it for myself because in truth, I have not looked into the financials of Hyflux for a long long time. 

So here it goes.

Tackling the Qualitative and Business Aspects of Hyflux

If I were to invest in Hyflux it must be something that caught my attention. Either it is a special situation, where some corporate actions might be anticipated in the near term, such that it make sense to speculate on it. 

Or that its a business that has a recurring cash flow and the stock price have fallen to an attractive valuations. 

Hyflux is not. Majority of Singaporeans would have associate Hyflux with the desalination history of Singapore. There are usually 2 aspects to these business. 

The first is the building of it. The second is taking over and operating the business. The former usually an orderbook business, which is non recurring. The latter is recurring. However, we are not sure for the latter how volatile are the cash flow usually.

One of the reason I have ignored these altogether was that I was told there is not much money to be made.

By this, I was told either there are a lot of project risks or that the rates are regulated and setup in such a way that is challenging to operate. 

Perhaps they are set up much more favorably overseas, but for those Singapore companies that operate locally, or overseas, they have all been challenging business. 

From Boustead’s water business, Citic Envirotech, Hyflux, Asia Water, they have never been good businesses.

Thus, by advise, I sort of got myself out of the equation. 

I suppose the appeal for a dividend investor have been the cumulative perpetual preferred shares and perpetual bonds. When issued, they gave a very attractive 6% returns. In a low rate environment, we can be seduced into something like that. 

And thus, the assessment should shift to see whether Hyflux would have a problem paying for the preferred or perpetual bonds.

The Bonds and Preferreds

If we want to go back to history to see if we would get invested or not get invested in these hybrid bonds, we have to take note of when they are issue and the financials during the period.

On 25th April 2011, Hyflux first issued $392 mil worth of these cumulative preferred shares (CPS). These preferred shares stays on Hyflux’s equity side of the balance sheet and pays out a dividend. 

To declare normal dividends to Hyflux’s shareholders, Hyflux need to declare to the CPS holders.

While perpetual, Hyflux can call or purchase the CPS back in 2018. If not, the dividends will step up to 8%.

In 23 Jan 2014, Hyflux issued perpetual capital securities with a distribution rate of 5.75%. Hyflux issued $300 mil worth of these, and they stayed on Hyflux’s equity side of the balance sheet.

Subsequently on 29th Jul, they issued $175 mil more at a rate of 4.80%.

Then on 27 May 2016, Hyflux issued more of the same perpetual capital securities with a distribution rate of 6.00%. The amount issued was $494 mil net of cost.

In July 2016, the company redeemed $175 mil worth of the 4.80% perpetual securities issued on 29th Jul 2014.

So in summary there was issue in:

  1. 2011: $392 mil
  2. 2014: $469 mil
  3. 2016: $494 mil and redeemed $175 mil

This means that for the retail investors, there will be three groups of them evaluating the financials of Hyflux and having a chance to purchase: 2011, 2014 and 2016.

They would have taken a look at Hyflux financials prior to this to make their assessment.

I subscribe to the notion that, your first analysis will tell you there is risk, but if things are not always super clear, you could get invested in small amounts, before increasing how much you invest in. 

If you detect things that make you uncomfortable, sell it. 

So this means that for the period of probably 2009 to 2017, there are plenty of time to take a look at the financials to make your evaluation.

Deciding Which Kind of Cash Flow to Look Into

To see if a company like Hyflux are well managed to provide the cash flow to pay interest on debt or dividends on equity, you have to take a look at the financials. 

But which one?

We probably have to understand the seniority of the different kind of capital financing in Hyflux. The seniority of the capital asset determines who gets a claim on the available assets first in the event of a liquidation. Those that are too far down will have greater risk of getting much less in that event.

Unfortunately, we are seeing this played out today.

Typically, the lenders (which are those on the liabilities part of the balance sheet) gets a claim first. Then its the equity holders (those on the equity part of the balance sheet)

Within the lenders and the equity holders, there are different seniority. 

The CPF and the perpetual securities are like hybrid bonds, half bonds half equity. They sit on the equity side of the balance sheet, does not have voting rights, and people trust them as more bonds.

So the seniority is someone like this (with 1 being more senior):

  1. bank loans
  2. corporate bonds
  3. high yield bonds
  4. perpetual or preferred securities
  5. equity

So the CPS and perpetual securities sites below the bank loans but before the ordinary equity holders. 

I would think a sound company should address their obligations based on this ladder. 

Typically, we can itemize the computation of my Investors cash flow (read my detail article on cash flow here

  1. Start with (+ Operating Profit Bef Working Capital Changes)
  2. – Income Taxes Paid
  3. – Interest Paid
  4. + Interest Received
  5. + Dividends Received from Joint Venture & Associates
  6. – Dividends Paid to Minority Shareholders/Preference Shares/Perpetual Securities
  7. – Maintenance Capital Expenditure
  8. – Reinvested into Hyflux, Pay out as dividend, Pay down debt

The CPS and perpetual securities would have to be paid out before the ordinary shareholders. 

However, you would probably have to take into considerations paying income taxes, paying interest. I suppose I am on the fence whether maintenance capex should be before the CPS obligation but I think it might be safer to include.

While I have typically left out the change in working capital, we should always evaluate whether working capital changes year on year to avoid being myopic and ignoring poor working capital management.

If we are considering the sustainability of Hyflux’s bond issue then perhaps what we should be concern about is the operating profit after taxes is paid and less of 6 to 8.

Evaluating the Quality of the Net Income

Hyflux 1

The table above focus on the headline financials of Hyflux from 2009 to 2017 (which is the last available annual report).

I have append the milestones when the CPS and perpetuals were issued, as well as the amount of dividend paid to the CPS and perpetuals. 

There is a tendency for investors to see the profit and conclude whether the company can sustain the dividend or interest payment. 

The profit in the income statement is based on accrual accounting, and they will contain non cash items. 

For example, for Hyflux’s service concessions may not be ready for operation. They might not immediately see the cash flow coming in, since it has yet to be completed, but that might be accounted within the revenue of Hyflux. 

Exceptional items such as the sale of buildings or subsidiaries, which are one off my inflate the profit. 

As we see based on profit, Hyflux could pay for their perpetuals and CPS for a lot of the past years. The profit is more than the cash flow required to pay the dividends. 

It is only until the last 2 years then the profits start looking poor. 

If you are an investor basing your decision making using profit, you could see yourself getting invested in the 2011, 2014 issue and you think things are OK. 

However, I felt that for those who purchase the 27 May 2016 tranche, they should absolutely be uncomfortable when they see the full year 2016 results released on 23 Feb 2017.  This is when for the first time the annual profit fell off the cliff. They should have their guard up.

Examining the Operating Cash Flow and Free Cash Flow

If we cannot get a very clear picture of accrual accounting, the cash flow could give us a better picture.

Here is the operating cash flow, free cash flow and the related information:

Hyflux cash flow statement

I have taken out some items that are pretty consistent, or contribute too little to the decision making. These are the income tax, dividends from JV & associates, interest income. 

The interest expense for Hyflux is big, and it is more senior than the dividend payments. It has to be paid.

You would see the end result in the Net Ops Cashflow and FCF.

The operating cash flow before working capital (#1) would show us the cash brought in before working capital changes. This is probably a good place to look if you are a bond investor. 

The operating cash flow before working capital is rather consistent from 2009 to 2013, and then in 2014 it fell off the cliff. That is when they sold Hyflux Marmon Dev and did a sale and leaseback of Hyflux Innovation Centre. These 2 items were deducted from the operating cash flow. 

This is probably the first red flag in that, how come the existing business would not generate cash flow after the past consistent cash flow. 

2015 and 2016 results here would reassure investors.

If we look at the change in working capital, we can see some wild fluctuations in working capital, typical of order book based business. Still, we do not see a continuous negative change in working capital, but there were some years where the revenue and inventories were cleared more than in the past years.

It is in #2 that we see Hyflux broke out a change in receivables that are very different from other people. 

Combined, the cash outflow from these 2 items is huge. 

Hyflux service concession

Due to their right to operate the plant, they should received a cash flow from the guaranteed minimum payment during the concession. From the extend of the negative amount, it is as if they were owed these cash flow, but were accounted in Hyflux’s revenue first. We do see that the change in financial receivables going down but intangibles remained elevated.

In 2016, these two were combined together.

If we look at the net operating cash flow (excl WC) and including WC (#3),  it was largely OK until 2014 – 2015 when the cash flow, after factoring in interest expense, taxes does not sustain the perpetual and CPS dividends.

There must be a reason why Hyflux took out these intangible and receivables from service concessions.

It is likely they make their cash flow look damn shitty. 

If you consider the net operating cash flow with all these service concessions, it looks damn up and down over 2009 to 2017.

What does this mean?

I think it basically means after taxes, and interest payments, the cash flow is very irregular. 

If I am the 2011 CPS holder, I would ask myself in 2014 or 2015 whether Hyflux can continue to pay my dividends. This is after seeing 2 years of very large negative net operating cash flow in 2013 and 2014. 

So after Hyflux finish issuing $469 mil of securities in 2014, those holding that and those holding 2011 should be rather wary already

Lastly, lets finish off this by looking at the capital expenditure and free cash flow (FCF) (#4):

The capital expenditure is not to excessive and looks pretty OK. Again if we ignore the receivables from the service concessions, you could say that before 2014, as a CPS holder, its pretty OK. 

If you include the adjustment to the financial receivables, it looks damn red. 

As a CPS and perpetual securities holder, your dividend should be paid out of FCF.

On this level, before you subscribe for the 2014 and 2016 perpetual securities, you should asked management to elaborate more on the cash flow. If not you should steer clear.

How should we look at the financial receivables from service concessions?

Now, from time to time, some companies would try to explain their cash flow better. 

They will explain that most investors are not from the industry, and are not clear about the “unique operating environment”.

Sometimes, this is real.

Sometimes, this is very bullshit. 

The problem often is that you are really not familiar with the industry, so you cannot tell this is real or bullshit.

So how should we handle this?

I would look from my own perspective. As a CPS and perpetual holder, Hyflux can pay me back only through cold hard cash via their operation or through debt.

If they say this is a timing issue, and that eventually they will be paid, then we should see some massive cash inflows over the years

So you should see some big negative FCF and some big positive FCF. 

You should also see these big negative net operating cash flow and big positive.

If you look at Hyflux, you see a lot of big negatives cash flow.

Where are the big positive cash flows?

The Different in Mindset when you invest in Debt like Securities

I think we have to be honest here. 

If you invest in debt like instruments, sometimes you cannot use the same metrics of evaluation as equities. 

The main reason that they want to borrow money from you is either they are in the expansionary phase or they have funding challenges.

This is why they ask money from you. 

There are some of these businesses that are order book based, or that before they stabilized, they are going to burn a lot of money

Of course there are those businesses that have recurring cash flow. They maintain the debt as a consistent capital structure. You can see the REITs and companies like Genting International as examples of these.

You can choose not to invest in the debt like instruments of the orderbook based or expansionary business and focus on those recurring business.

But most of the time, the market is rather efficient

If the business is assessed to have rock solid cash flow, their yield would likely be much lower! The low yield that you would say “this is not attractive!”

If you want that yield, you have to contend with these kind of uneven operating or free cash flow.

Increasing Amounts of Capital Financing

There is quite a few hybrid securities issued by Hyflux, so let us take a look at the balance sheet over the years:

The debt to asset looks very manageable except in 2013 when the debt to asset approached 47%. Perhaps that is when they realize that they have to take on more equity financing in 2014. 

The picture gets distorted because the perpetual raised is can be considered part debt. If we were to include that as debt, then Hyflux would have been in distressed much early than now. 

Of course if you say perpetual and preferred are debts then they wouldn’t be issued in the first place. It is pretty complicated. 

The ratios looked fine, but as you view the financials as a whole, you get this narrative:

  1. cash is not increasing. In fact whatever that was raised, was used up and never replenished
  2. any debt or equity raising didn’t result in recurring cash flow or one time large cash inflows
  3. we also didn’t see much one time special dividend

It gives us the feeling that they are taking more debts, and to keep the ratio healthy, they are issuing more equity financing.

The Failed Profitability Model

Although you are investing in the perpetual securities and the CPS, you got to ask yourself whether the risk in this company is rising.

If the risk is rising, even if your securities is not affected today, it should be affected quite soon.

If you buy a hybrid security from a property developer, the cash flow might be lumpy but you know if they have sold locally, you should see a bump up.

The biggest gripe for Hyflux is that, they have invested so much through capital and debt raising, but it didn’t translate to any meaningful profit results!

That is somewhat similar to picking an employer to work. If your employer is one company that at least is growing its revenue, there are higher chances of greater development and opportunities. If you work for one that is in decline or in a challenging situation, getting these opportunities is going to be tougher. 


Ultimately, what did Hyflux in was that their cash flow could not pay for the perpetuals any more. They basically went into a default and triggered the subsequent actions that we saw in the news.

Hyflux was able to survive negative free cash flow for many years, relying on debt and equity raising to keep things going. Why couldn’t they do it further? 

I suspect is that their debt to equity was very high already. 

The banks find them a risky proposition. They just issued their perpetual in 2016. They finally cannot take on more equity and debt raising to pay the interest and dividend obligations.

Ultimately, my conclusion is that:

  1. As a 2011 holder I could have stayed long but likely after seeing the results in 2013, and 2014, I would have become very weary
  2. Based on the past result, it is quite risky to take your position in the 2014 and 2016 issue

Would the financials tell us that a nightmare may unfold? Probably.

Would the financials tell us an immediate liquidity issue? Seems almost a lot of years it is as if they cannot pay out the dividends. However, what I learn is that when FCF is negative, there is still capital raising. We have to see when capital raising also dried up. 

That is probably the biggest learning lesson for me. 

We could detect weakness in the financial structure, but the magnitude of the end result and the share price reaction is another matter altogether.

This piece does not talk about the saga, but if you are caught in it, SG Dividends have written extensive on it

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Andrew Wheeler Confirmed As The Nations 15th EPA Administrator

Andrew Wheeler has been confirmed as the nation’s 15th administrator of the Environmental Protection Agency

The Senate voted 52-47 to confirm the former coal lobbyist, who has served as acting EPA chief since former Administrator Scott Pruitt resigned amid ethics scandals last July.

In a statement posted to Twitter, Wheeler said he was “deeply honored” and looking forward to carrying out President Donald Trump’s agenda. 

Sen. Joe Manchin (D-W.Va.) voted against Wheeler after having supported his nomination as deputy administrator last year. Sen. Susan Collins of Maine was the lone Republican to vote against the nomination. She opposed Pruitt’s nomination but, like Manchin, previously voted to confirm Wheeler as the agency’s No. 2 official.

In a statement Wednesday announcing her decision, Collins said Wheeler is “certainly qualified” but that she has “too many concerns with the actions during his tenure as Acting Administrator to be able to support his promotion.” 

“The policies he has supported as Acting Administrator are not in the best interest of our environment and public health, particularly given the threat of climate change to our nation,” she said. 

His confirmation adds yet another member to President Donald Trump’s Cabinet who as recently as 2017 was on the payroll of the industries he now regulates.

Former coal lobbyist Andrew Wheeler has been confirmed by the Senate as the next Environmental Protection Agency administrato

Former coal lobbyist Andrew Wheeler has been confirmed by the Senate as the next Environmental Protection Agency administrator.

In 2017, the Senate confirmed Alex Azar, a former executive at the pharmaceutical giant Eli Lilly & Co., to lead the Department of Health and Human Services. In January, former Boeing executive Patrick Shanahan took over as acting secretary of defense after James Mattis’ abrupt departure. The next day, David Bernhardt, a former oil lobbyist and No. 2 at the Department of the Interior, became acting secretary when Ryan Zinke resigned amid mounting ethics investigations. 

A week later, Trump nominated Wheeler, who in December became the longest-serving acting administrator in the EPA’s history, to take on the role permanently. 

Thursday’s confirmation comes a day after the Senate voted 52-46 to end debate on the nomination. In a speech on the Senate floor following that vote, Sen. Tom Carper (D-Del.) said that in some cases Wheeler has “accelerated the environmental damage and regulatory zeal” that Pruitt began. 

“Time and time again Mr. Wheeler has proven that his environmental policies are almost as destructive and extreme has his predecessors’,” he said. 

Sen. John Barrasso (R-Wyo.), chair of the Senate Committee on Environment and Public Works, said Wednesday that Trump picked the right man for the job. Regulatory proposals to replace the Clean Power Plan, an Obama-era rule to cut carbon pollution from power plants, and to revise the 2015 Waters of the U.S. rule, which sought to safeguard drinking water for millions of Americans, shows that Wheeler “is serious about clear air and clear water while also understanding there’s an important role for states and local communities to play,” Barrasso said.

Wheeler’s record-breaking reign as acting administrator was marked by an unprecedented assault on greenhouse gas regulations amid historic wildfires and hurricanes that scientists say offer a preview of the rapidly warming world to come. 

In August, Wheeler unveiled a proposal weakening fuel economy standards for new vehicles in a move seen as a “giant giveaway” to oil companies even as electric automobile technology made huge leaps forward. Weeks later, he proposed gutting a landmark Obama-era power plant regulation, allowing, by the EPA’s own calculus, enough pollution to cause an additional 1,400 premature deaths per year.  

The planet has already warmed more than 1 degree Celsius above pre-industrial levels. As a result, many Americans born after the mid-1970s have never experienced average temperatures unaffected by human-caused emissions. But in October, the United Nations released a landmark report predicting catastrophic effects of warming beyond 1.5 degrees Celsius ― a fate that’s all but certain unless world governments halve emissions by 2030. A month later, federal scientists from 13 agencies, including the EPA, confirmed the findings in a National Climate Assessment that forecast U.S. average temperatures surging “9°F (5°C) or more by the end of this century.”

In response, Wheeler, despite admitting he hadn’t read the multiagency report, dismissed its findings and threatened to intervene in the drafting of the next National Climate Assessment.

In December, Wheeler delivered another two victories to the coal industry that, until mid-2017, had paid him to lobby the government. He proposed loosening requirements that coal-fired power plants reduce carbon dioxide emissions. He capped off the month by announcing plans to relax a rule restricting how much mercury and other dangerous pollutants coal-fired plants can release into the air.

In February, Wheeler announced that the EPA would consider regulating toxic, cancer-causing “forever chemicals” contaminating drinking water across the country ― a move critics said amounted to a delay that could sicken millions. Last week, he broke off negotiations with California over a national vehicle fuel economy standard, setting the administration up for a lengthy legal fight with the Golden State, which is allowed under the Clean Air Act to set its own pollution limits. 

Man Who Shot 3 Black Men After Hurricane Katrina Dies After Sentencing

A white Louisiana man who shot three black men in a racist attack in the wake of Hurricane Katrina has died just days after he was sentenced to 10 years in prison.

Roland Bourgeois Jr., 56, whose legal battle over the 2005 shootings had been dragged out over concerns about his health, likely died last week from natural causes, according to officials, though an investigation remains ongoing, the Plaquemines Parish Coroner’s Office told HuffPost.

“The cause and the manner are still pending,” the office’s chief investigator, Charles Guey, told HuffPost, adding that the autopsy’s full results are expected to take anywhere from four to six weeks.

Roland Bourgeois Jr., 56, died less than a week after being sentenced to 10 years in prison for shooting three black men in N

Roland Bourgeois Jr., 56, died less than a week after being sentenced to 10 years in prison for shooting three black men in New Orleans.

Bourgeois was taken to a hospital after staff found him unresponsive at the Plaquemines Parish jail, the New Orleans Advocate reported. His death on Feb. 19 came just five days after he was sentenced for federal charges of committing a hate crime and illegal use of a weapon as part of a plea deal.

Bourgeois was charged in 2010 for shooting the men after they entered the Algiers Point neighborhood in New Orleans on Sept. 1, 2005. It was three days after the city’s levees broke, flooding most of the city.

The victims, one of which was gravely wounded in the shooting, were attempting to reach a ferry landing that state and federal agencies had turned into an evacuation site when they were shot by Bourgeois. Charges filed against him noted that Bourgeois had hurled racial epithets before the attack and told one neighbor: “Anything coming up this street darker than a brown paper bag is getting shot.”

His trial’s conclusion was said to resolve the last of the Katrina-era civil rights abuse cases.

The Low-Priced Way to Lose Money in the Stock Market

Once upon a time, I used to recommend stocks. I did that for a living.

One of the most common questions I received when I recommended a stock priced in three or four digits was this – “What is the point of buying a stock this expensive? Recommend something under Rs 100, or better, Rs 10, or better, Rs 5.”

The reasoning was simple – “It’s easier for a Rs 10 stock to go Rs 100, than for a Rs 1,000 stock to go to Rs 10,000.”

At the start of my career, this reasoning sounded reasonable. But it turned out to be one of the biggest misconceptions I’ve ever had in my career as a stock analyst and investor. Thankfully, I got over that misconception early.

Of course, a car that sells at Rs 20 lac may be more expensive than one that sells at Rs 5 lac, even when you discount for better features etc. But a stock that sells for Rs 2,000 or even Rs 20,000 is “not” more expensive than a stock that sells for Rs 20 or Rs 200, just because of its price tag.

In fact, it’s never about the price in stock investing. It’s always about the price-to-value offered, or price-to-underlying business quality.

The stock of Asian Paint, for instance, is priced at Rs 1,460 as I write this. The stock of MRF if priced at Rs 60,000. Now, if I were to go purely by stock prices, MRF certainly looks like a much bigger company or a more expensive stock as compared to Asian Paints.

But, consider this. While Asian Paints’ stock price is just 2.5% of MRF’s stock price, the former’s market capitalization of Rs 140,000 crore (stock price multiplied by number of shares) is 560% (or 5.6 times) of the latter’s Rs 25,000 crore.

What is more, if I were to consider the price-to-earnings multiples, Asian Paint’s P/E of 65x is 300% (or 3 times) of MRF’s P/E of 21x.

That makes MRF’s stock, priced at Rs 60,000, much cheaper than Asian Paints’ stock, priced at Rs 1,460.

Now consider the most expensively “priced” stock in the world, that of Warren Buffett’s Berkshire Hathaway. Its current price is US$ 308,810 (Rs 2.2 crore, per share!). Market cap is US$ 500 billion, or 25% of the total market cap of all listed stocks on the Bombay Stock Exchange. This makes the stock look so-so expensive, right?

Now, what’s Berkshire’s P/E? As per Yahoo Finance, it’s 8.2x. This makes the stock much cheaper than the cheapest of large companies in India. We are not going into details of what makes Berkshire’s P/E so low. But you got the point, right?

It is that the stock price alone never tells you whether a company’s shares are expensive or not. To know that, you must relate the price to something in the denominator, like sales, earnings, and book value (even these don’t tell much about a stock’s cheapness or expensiveness but are reasonable indicators). You must also assess the underlying quality and economics of the business. An Infosys at 10x P/E is cheap. A Tata Steel at 10x P/E may not be so (commodity stocks trade at low P/Es due to cyclicality).

Let’s look at one more example. Suzlon Energy’s stock is priced at under Rs 4 now. Its market cap is Rs 2,100 crore. An investor looking just at these numbers would say, “Isn’t it easy for Rs 4 to go to Rs 20? That would make it a 5-bagger!”

My dear friend, that’s one way to look at it. But isn’t Rs 4 closer to Rs 0 than to Rs 10 or Rs 20? What stops Suzlon from going to zero? The stock is anyways down 99% from its peak of 2008.

Here, one common misconception a lot of people have is – “The stock has already fallen by 99%. How much more can it fall?”

Well, a stock that falls 99%, first fell 90%, and then 90%. What stops it from falling another 90%?

Yes, it happens sometimes that some low-priced stocks double and triple in quick time? But you won’t like the reason why this happens most of the time.

Low-priced stocks, especially the ones from the small and penny cap spaces tend to be thinly traded. So, they can skyrocket briefly on a news release or a recommendation or plain rumour, and then plunge just as quickly. Not to forget the fraud and market manipulation rampant in such stocks that ultimately cause massive losses to the gullible investors who wander into this swamp.

Of course, fraud and manipulation – business wise or in the stock market – is also seen in stocks from the more established mid and large-cap spaces, as we saw in a few cases recently. But low-priced stocks, especially from the small and penny cap spaces, are hotbeds of such evils. The base rate of succeeding here is very poor.

All in all, it comes back to the same cardinal rule that you must stop looking at stock prices while making your investment decisions.

A low price does not automatically mean cheapness and guarantees future greatness, like a high price does not automatically mean expensiveness and guarantees future mediocrity.

As a quick thumb rule, look at the P/E ratio of the stock you are studying to find out whether it’s cheap or expensive. Take the current stock price as ‘P’ and last 12-months earnings per share as ‘E’. Better, take last 3-5 years’ average earnings per share. Compare this P/E with P/E of other stocks in the industry and with the stock’s own past P/E track record.

If the stock’s P/E is lower than its peers’ or from its past, explore the reasons. Maybe the business is worse than its peers or has deteriorated in terms of sales and profit growth, or the profit margin or return on capital has come down, or maybe the debt level has increased.

If you find nothing wrong with the business’s fundamentals, the stock deserves a deeper look, for its relative undervaluation. Study that.

But, again, never ever count on a stock’s price to tell you that it is cheap or expensive, in an absolute or relative basis.

Doing that is not just lazy, but silly.

The post The Low-Priced Way to Lose Money in the Stock Market appeared first on Safal Niveshak.

Signs of Topping in the Consumer Credit Cycle

Don’t bother counting me in the camp that thinks they can predict when the next recession will hit. The current consensus from those who try to do such things seems to be sometime in 2020, but I don’t think anybody really knows.

But that does not mean that keeping an eye out for economic signals is not worth doing. If the consumer credit cycle, for instance, is nearing a top, it very well may impact what multiple of current earnings you are willing to pay for shares of financial services companies. When you see strong return on equity metrics for full year 2018 this earnings reporting season, you might consider the notion that further expansion could be minimal.

In recent months I have come across a couple of interesting press reports that help shed some light on where we are in the current consumer credit cycle, both from the Wall Street Journal.

First, we had a piece in mid December about how credit reporting giant Experian was going to start including cell phone bills in credit reports. The goal is to boost credit scores so that lenders can widen their pool of eligible borrowers:

“Most lenders tightened standards dramatically after the 2008 financial crisis, and have been in intense competition for the most creditworthy borrowers ever since. And while most large banks have limited appetite for the subprime borrowers they lent to in the runup to the financial crisis, some have been eyeing customers with thin borrowing histories as a new revenue stream, a sign the lenders believe the good economy still has room to run.”

So rather than scare their investors and regulators by accepting lower credit scores when considering new borrowers, why don’t we ask the credit scoring bureaus to find ways to raise credit scores so that more people qualify. Yikes.

And cell phone bills are not the full extent of the changes. The article goes on:

“Fair Isaac Corp. , creator of the widely used FICO credit score, is close to launching a new credit score in partnership with Experian that will factor in consumers’ history managing their checking and savings accounts, which will give a boost to most consumers who keep at least several hundred dollars in their accounts and don’t overdraw.”

Given that the credit reporting companies get paid by the lenders, not consumers, it stands to reason that when approached by their customers to refine their scoring methodologies, they were amenable to the idea. Kind of reminds me of the scene in the movie The Big Short when the Standard and Poor’s employee explains why they rated all of those sub-prime mortgage bonds triple A; “because if we didn’t give them the ratings they wanted, they would go down the street to our competitor.”

The signs of a topping credit cycle don’t end there, unfortunately. It appears unconventional mortgage underwriting is making a comeback as well:

“Aryanna Hering didn’t have pay stubs or tax forms to document her income when she shopped around for a mortgage last year—a problem that made it tough for her to get a loan. But the nursing student who works part time providing home care for children and the elderly eventually hit pay dirt: For a roughly $610,000 home loan, a mortgage company let her verify her earnings with 12 months of bank statements and letters from clients. Ms. Hering said money she collects from roommates and from renting to Airbnb guests covers more than two-thirds of her roughly $4,300 in monthly payments, and her earnings cover the rest.”

While not a large proportion of the overall home lending pool, these types of loans are growing quickly:

“Lenders issued $34 billion of these unconventional mortgages in the first three quarters of 2018, a 24% increase from the same period a year earlier, according to Inside Mortgage Finance, an industry research group. While that makes up less than 3% of the $1.3 trillion of mortgage originations over that period, the growth is notable because it came as traditional home loans declined. Those originations fell 1.2% over the same period and were on track for a second down year in 2018.”

So what exactly were the terms of the loan Ms. Hering received? Tell me if this sounds familiar:

“Ms. Hering, who is 30 years old, received a loan at a rate of just over 6% for the first five years; it adjusts after that.”

Do these stories mean that the economy is about to collapse a la 2008? Of course not. All it means is that the business cycle is alive and well and that consumer lending has reached the point where prime borrowers have reached a level of debt they are happy with and lenders are now stretching a bit to grow. This happens every cycle, frankly. What it tells me is that delinquency rates are probably troughing out and overall credit quality and lender returns are probably peaking.

While these are important tidbits to consider when valuing financial services companies on multiples of book value or normalized return on equity, it is probably not going to help pinpoint the next recession. Leave that job to the economist community that has correctly called ten of the last five recessions, or the Federal Reserve, which has never (and will never) predicted one at all.

Tesla’s Catastrophic Debt Addiction Should Terrify Investors

Tesla investors should be nervous right now.

The company faces a looming $1 billion debt deadline on Friday. The repayment will wipe out a third of Tesla’s cash reserves instantly.

But it gets worse. Tesla is reportedly about to take on a further $2 billion in loans to fund its new gigafactory in China.

The situation is gloomier still. Elon Musk bought a mountain of Tesla shares with borrowed money. And he put up other TSLA shares as collateral. The company even admitted in a recent filing that this move could kill the stock price.

Tesla is a House of Cards Built on Debt

Tesla is built on a precarious pile of debt that could come crashing down at any moment. It comes as Elon Musk finds himself in hot water for violating securities law and amid calls for Musk’s resignation as CEO. Let’s dig deeper into this.

Tesla’s $1 Billion Debt Deadline

According to a Securities and Exchange Commission (SEC) filing, Tesla owes bondholders just short of $1 billion on Friday. And Musk will be forced to pay in cash.

Per the official wording, $920 million in convertible senior notes will expire on March 1st at a conversion price of $359.87 per share.

The problem is, the company’s shares are nowhere near the conversion price of $359.87. Even after a 6 percent rally yesterday, Tesla’s stock is currently valued at $314.74. 

It means Tesla can’t convert the bonds into common stock as Musk would have hoped. Instead, he’ll have to dig into the company’s cash reserves. It’s a move that former asset manager Darius Brawn said could trigger a “cash crunch” at the company.

Tesla Planning Another $2 Billion Loan in China

The enormous debt mountain doesn’t seem to faze Elon Musk. According to a report by JL Warren Capital, Tesla is tapping Chinese lenders for another $2 billion in credit. The loan would apparently spur Musk’s goals of producing half a million cars per year.

The borrowed capital will fund Musk’s gigafactory in China, which could give it an edge over all other Western automakers. As Musk said in January’s earnings call:

“We need to bring the Shanghai factory online. I think that’s the biggest variable for getting to 500,000-plus a year. Our car is just very expensive going into China. We’ve got import duties, we’ve got transport costs, we’ve got higher costs of labor here.”

The $2 billion loan would reportedly be taken in stages with a 3.9 percent interest rate. The key backers are Industrial and Commercial Bank of China, China Construction Bank, Shanghai Pudong Development Bank, and Agricultural Bank of China.

Musk will argue that the loan is crucial to Tesla’s success in China. Currently, shipping cars to China incurs a 25 percent tax (which could double under threatened tariffs). Tesla’s Shanghai gigafactory would help Musk skirt these tariffs and hit his 500,000 production target.

Investors Should be More Concerned about Tesla’s Debt Addiction

tesla elon musk debt investors should panictesla elon musk debt investors should panic

Elon Musk needs to get Tesla’s fiscal house in order. Failing that, investors should be extremely concerned. | Source: Shutterstock

In a recent SEC filing, Tesla warned investors about its debt problem. The filing explains:

“Elon Musk has pledged shares of our common stock to secure certain bank borrowings. If Mr. Musk were forced to sell these shares pursuant to a margin call that he could not avoid or satisfy, such sales could cause our stock price to decline.”

What does this mean? Elon Musk has borrowed money to make all kinds of investments. Some of the money was even used to buy more Tesla stock.

To back the loans, Musk pledged his existing Tesla stock as collateral. If the stock price declined dramatically, Elon Musk could be forced to sell some of that TSLA stock to satisfy the terms of his loans. That act would crush the price of the company’s shares.

Tesla and Elon Musk have an addiction to debt. At a time when the electric vehicle company has only just started turning a profit (and a conservative profit at that), investors should be very nervous.

Disclaimer: The views expressed in the article are solely those of the author and do not represent those of, nor should they be attributed to, CCN.