Due to the
overwhelming number of emails I received in response to my earlier article
detailing the behemoth that is the derivative market.
question I’m receiving is: does deflation pose a REAL risk today?
is absolutely. Remember, the entire
financial system is broken in the US. Until we take our medicine and deal with
the hundreds of trillions of bad debts sitting on the banks’ balance sheets,
there is ALWAYS the risk of another 2008-type event.
Reserve has attempted to paper over these issues by offering Wall Street an
endless stream of Dollars. But this hasn’t addressed the underlying issues in
any way. The banks are still insolvent and the derivatives market is still the
primary concern for anyone who works in finance whether they know it or not.
deflation is and always will be a potential threat that can erupt at any time.
However, should deflation even take
hold of the markets again, the Fed and other central banks’ responses will
GUARANTEE that it is short-lived and that inflation, then hyper-inflation takes
over in a short period of time.
Bernanke has NEVER admitted that he was wrong about anything. The guy literally
believes he’s an economic genius who can save the world (thanks Time magazine
for buffering his ego). He is 100% positive that his policies are the right
policies. So if deflation reared its head again, he would do the same things he’s
already done (print money, engage in more QE, etc) only on an even larger, more
destroy the US Dollar and insure that we experienced either severe inflation
similar to that of the ‘70s or hyper-inflation similar to Weimar. Bernanke’s
nearly pushed into the former already and deflation hasn’t been seen in the
financial markets in over two years.
better believe he’d go all out if deflation poked its head up again. Imagine if
a grizzly bear got up and tried to attack you after you already brought it down
with repeated gunfire. What would you do? You’d blow its head off and then walk
up to the body and shoot it until you ran out of bullets to make sure the thing
didn’t get up again.
do the same thing to deflation. He’d throw so much money at it that he’d not
only kill it dead, but he’d also kill the US Dollar and send us straight into
Zimbabwe-land without even a moment’s pause.
deflation is a threat. And it will
always be. But we might very well not see it again thanks to Bernanke’s
actions. And if it does show up
again, its presence would be very short-lived.
I call it The Financial Crisis “Round Two” Survival
Kit. And its 17 pages contain a wealth of information about portfolio
protection, which investments to own and how to take out Catastrophe Insurance
on the stock market (this “insurance” paid out triple digit gains in the Autumn
is all 100% FREE. To pick up your copy today, got to http://www.gainspainscapital.com
and click on FREE REPORTS.
PPS. We ALSO
publish a FREE Special Report on Inflation detailing three investments that
have all already SOARED as a result of the Fed’s monetary policy.
Three sections of the Patriot Act — the so-called ‘library provision’
that allows a secret court to issue orders for anything deemed
relevant to an investigation; the roving wiretap provision that
allows the government to get a wiretap order that doesn’t specify the
person or place to be tapped; and the ‘lone wolf’ provision, which
permits intelligence wiretapping of people not connected to a
terrorist group — are scheduled to expire on February 28. It’s
Sen. Dianne Feinstein (D-Calif.) recently suggested that Congress doesn’t have enough time to consider reforms this year. That was the excuse for last year’s Patriot Act reauthorization.
Members of Congress had suggested that they would use 2010 to really
examine the effects of the USA Patriot Act and return to it in early
2011 ready to make much-needed changes.
And where are we now?
Well, Congress is betting that while they weren’t thinking about the
Patriot Act in the past year, you weren’t either. Late in the day on
Friday, we learned that the House will vote tomorrow, Tuesday, Feb. 8,
on a bill to extend the expiring Patriot Act provisions until
December 8, 2011. They want to sneak this reauthorization through,
and they’re hoping that you don’t notice.
again, we’re asking you to tell Congress that you are watching, that
you don’t buy their fear-mongering or their scare tactics, and that
you want real Patriot Act reform. We’ve put a new action alert up urging Congress not to rubber stamp the Patriot Act once again, and we urge you to take action. For almost 10 years, the Patriot Act has given the government too much leeway to pry into our private lives.
As the Electronic Frontier Foundation and others have documented (see this, this and this), the Patriot Act would not have prevented 9/11, and has led to numerous crimes by the FBI and other agencies.
NOW and tell them to vote down renewing the Patriot Act. Word from D.C.
is that the Patriot Act will be renewed unless there is strong public
Remember, the Patriot Act was apparently written before 9/11, and the government’s spying on Americans began before 9/11 (confirmed here and here. And see this) . These assault on the Constitution did not keep us safe.
Indeed – as I’ve previously noted – the “national security” apparatus has been hijacked to serve the needs of big business, and is not really protecting us.
For over a year now, Zero Hedge has been predicting that in its foolhardy attempt of “inflation or bust”, the Fed’s actions would sooner or later lead to mass rioting and possible revolutions as a result of surging and out of control food prices (which are just the peak of the alternative investment pyramid – yes, stunningly free money can go into other things besides stocks). There have been those who have claimed that deflation is still a far greater force, despite that the all important shadow banking system made a positive inflection point in ending deleveraging in Q3 (and on March 10 we will know whether the Q3 strength persisted into Q4) as was discussed previously, and today’s first time in over two years increase in revolving credit merely confirms this view. Alas, to all who believe that deflation or deleveraging is a greater threat: you have our sympathies, as fundamentally your are correct, and were the business cycle have the benefit of playing out in normal course, all the world’s banks would become insolvent and yes, deflation would be rampaging. The problem is that these same people do not realize that to Bernanke (whom we have referred Genocide Ben for precisely this reason) there is no other alternative, and inflation must be achieved no matter how terrible the social cost, or the damage to the monetary system. Regardless, the actions in North Africa are just the start. Commodities will run up far higher, and discontent will sooner or later reach to Asia, and possibly to countries which have nuclear arsenals at their disposal. What happens then is anyone guess. Yet for anyone who is still confused about the ultimate Fed agenda, Dylan Ratigan and Bill Fleckenstein sat down late last week to make it so clear that virtually anyone and everyone can understand what the Bernanke endgame is.
After it was already confirmed that December was a subpar month for US retailers (whether snow can be blamed or not is irrelevant), and less money than expected was spent (it’s ok, we no longer need the US consumer to lead the economy – the Fed is buying all the debt, it can also buy everything else), we finally get our first glimpse as to how even the week consumer performance in December was funded. Two words: “Charge it.” Total US Consumer Debt in December rose by $6.09 billion December, on expectations of a $2.4 billion increase (and $4 billion higher than November’s revised $2.022 billion). Yet what is most notable is that while Non-revolving loans increased by $3.8 billion (the lowest in the past 4 months), revolving loans posted their first increase since August 2008, increasing by $2.3 billion. Is the US consumer so tapped out that it is time to go to the credit card once again? And if so, does this mean that the drop off in excess reserves by over $180 billion compared to where they should be has been due to consumer lending. If that is the case, we may be far closer to Bernanke losing control of the trillions in excess reserves (and a surge in “velocity” or however one calls this archaic construct) than we had expected previously.
As of the end of December, total NYSE margin debt of $276.6 billion hit a fresh post-Lehman high, as increasingly more investors continue to purchase securities on margin (i.e., debt). The $2.5 billion rise from November margin levels is the highest since September 2008, and $103 billion from the market lows of March 2009. That said, margin fever still has a way to go and it could easily reach the June 2007 all time high of $381 billion, a little over $100 billion from here. Notable is that while investors had a negative net worth for the sixth month in a row, the differential declined modestly primarily due to a jump in credit balances in margin accounts which hit $148 billion: the highest since February 2009. As historically there is a decline in credit margin balances into the new year, we expect total free credit less margin debt to increase materially in January, especially as the expected January correction (in parallel with the market activity of early 2010) has not materialized, and bullish bets have to be increasingly funded on margin. More relevantly, should short-term interest rates continue to jump (we will have more to say on the recent move in 2 Years), margin interest may soon be forced higher, making life for those who use nothing but debt to fund stock purchases a little more problematic.
Last week Zero Hedge presented The Forensic Factor’s latest report focusing on a company which TFF claimed was “The Most Preposterous Chinese Reverse Merger Yet” and discussing the shadier dealings of Chinese reverse merger AutoChina (AUTC). Following a prompt crash in the stock, the company was forced to reply immediately or else risk being seen as merely another RINO in waiting. Today, the soap opera continues with TFF responding to the management’s own response. And sure enough, the response has all the makings of a successful second season for what is rapidly becoming one of the most popular soap operas in the market: “Name That Chinese Fraud.” Management team: the podium is yours.
Full response posted by TFF:
AutoChina (Part 1.5) – Imagine if this was a U.S. company?
Stealing from the famous scene in the wonderful book/movie A Time to Kill,
we ask our readers to close their eyes (not literally) and imagine the
following scenario. Imagine a company that came public through the
underworld of a reverse Chinese merger. Imagine this company sold all of
its auto dealerships to an entity called Xinjiang – which at the time
represented the only material operations of the company. Picture the
company using a controversial accounting tactic called sales-type lease
accounting that overstates revenue and pulls forward profits. Now
imagine a wildly dilutive earn-out that crushes existing shareholders
while giving the CEO newly issued shares through fiscal 2013 that
represent between 5% – 20% annual dilution. Additionally, try to picture
this earn-out being set up in a manner that will still pay the CEO the
maximum – while diluting shareholders by 20%, even if the company misses
estimates by ~ 20% in 2011. Now imagine this same CEO, who receives
ludicrous compensation based upon EBITDA metrics, well imagine him
providing significant levels of related party financing at ZERO PERCENT.
Try to picture a related party page of the 20-F that has 18 rows of
transactions, the largest of which is a grocery store partially owned by
the CEO, and partially owned by a crony Director. Picture a VIE
organizational structure that appears to put equity owners in the
precarious position of having no direct ownership of the operating
company. Now imagine this same amoeba of risk having capital needs for
2011 of approximately $600 million in order to hit analyst estimates.
Now think about the existing CEO marketing an IPO of another company,
where incredibly, he is also the CEO and Chairman. Now imagine one door
down from this CEO, a CFO that was the Director of Research for one of
the largest ponzi schemes in U.S. history…. Now open your eyes and ask
yourself: would this story be acceptable, justify a listing on a U.S.
Exchange, and warrant institutional sponsorship if the company in
question was from California, New York, or even Nevada?
Nearly a week ago, The Forensic Factor (“TFF”), released our first report on AutoChina.[i]
In that report we covered a broad array of topics that provided the
foundation for our assertion that AutoChina has serious accounting
concerns and a corporate structure where equity holders own NOTHING. AutoChina
management published a response several days later discussing several
of TFF’s arguments, while completely ignoring others.[ii]
It was a pleasant surprise to see such a verbose response, even if it
ignored the most damaging questions, while manipulating and
sensationalized others. TFF respects management’s attempts to
communicate – a fact that we will later explain is necessary given their
sizeable funding gap for 2011. TFF has decided to provide the same
courtesy to management of AutoChina with a brief response of our own.
Our response will be brief in nature. TFF will save new and additional
information for our next report – one that will likely require another
response from management (perhaps much more damage control will be
management was correct when they stated it has become popular to attack
Chinese reverse mergers. However, TFF would point out that it hasn’t
necessarily been without merit. In many cases, blatant frauds have been
exposed, and at the very least, credible research has been presented
highlighting substantial risks that investors have potentially been
ignoring. TFF wants to be very clear that we do not believe AutoChina is a fictitious business[iii], it has not lied about its contracts and technology[iv], nor has it misrepresented its actual inventory or jewelry sales.[v] No, AutoChina actually operates a real business, and that is the problem.
accounting has been around for decades. As such, investors can expect,
with a high degree of accuracy, a predictable range of frequency and
severity metrics over time. AutoChina’s reported financials are such an
outlier from the myriad of historical models that any prudent investor
must ask the question – how? It is the fact TFF can understand
what AutoChina does that leads to the conclusion that AutoChina is a
horrible investment and that no prudent fiduciary can explain how they
overlooked: aggressive accounting methods that have historically been
documented as overstating revenues and earnings, reliance on related
party, sub-market rate financing, and an org structure that ultimately
leaves equity shareholders with nothing.
we absolutely do not think AutoChina is a fraud, we do believe it
possesses all of the warning signs that investors have come to associate
with problematic Chinese companies. In fact, TFF recently reviewed a
presentation by Paul Gillis, a Professor of Accounting at Peking
University and the former PwC Asia-Pacific Managing Partner.[vi] According to Gillis, the warning signs are:
would note AutoChina has a “check-positive” to all five bullets (at
least until Gillis’ old firm PwC completes an annual audit).
The VIE Structure Revisited
our first report, TFF raised grave concerns that AutoChina shareholders
owned nothing. In fact, we underlined one sentence to emphasize the
severe risk that shareholders faced: “ But a more
concerning reality for AUTC shareholders is that based on the org
structure it appears equity owners in AutoChina do NOT own the operating
companies.” TFF was surprised to see that management’s
10-page response failed to address this seminal issue. In fact, the VIE
explanation, or “Reference I” of management’s response, was comprised
of just four sentences. Management’s evasive, and carefully chosen
language towards the founding business versus the existing business,
suggests they are acutely aware of the VIE grenade. It is the belief of
TFF that truck leasing is NOT a protected business in China, hence there
is no need for this VIE structure given AutoChina’s only business is
truck leasing. In fact, TFF has learned that AutoChina’s PRC Counsel,
Zhong Lun Law Firm, advised the company that there is no foreseeable
legal impediment to the conversion of these contractual arrangements to a
direct ownership structure, or to the conversion of all of AutoChina’s
other contractual arrangements since the applicable foreign investment
restrictions have been lifted.[vii] So TFF is very confused why management would put forth this historical excuse for their VIE structure.
How dangerous is AutoChina’s corporate structure, one which looks eerily similar to Rino’s as illustrated in our last report? Prominent
China research boutique New York Global Group recently published a
report on Chinese VIE’s, with forceful language that should be
thoroughly examined by investors in AutoChina (underlined by TFF for
China based companies with VIE structures are the single biggest “time bombs” in the U.S. Markets. In a VIE structure, the public shareholders do not own the underlying assets in the operating entity
– the actual business that generates revenues and earnings for common
shareholders. Instead, all of the sales and incomes reported by the
public company and filed with the SEC are booked through contractual
agreements whereby a company’s management and founders agree to transfer
their rights to sales and incomes from the operating business to the
public company. The original founders retain the ownerships of the
underlying tangible hard assets such as cash, factories, land use
rights, machinery, customers etc. In theory and in reality, company
management and founders can choose to walk away and leave the public
shareholders with no legal claims to the assets of an operating entity. Doesn’t this sound crazy? It certainly does.[viii]
warning from NYGG is consistent with the concerns raised by TFF that
AutoChina shareholders have no real ownership of the operating
companies. In AutoChina’s disclosure segment of its 20-F, a risk
statement appears that validates TFF’s concerns, “if
there is any change of the PRC laws or regulations to explicitly
prohibit such arrangements, ACG may lose control over, and revenues
from, these companies, which will materially affect ACG’s financial
condition and results of operations.” Management did not address this issue in its response.
AutoChina’s Reference A & B & E – Gain on Sale Accounting
read management’s response carefully and appreciated management’s
candor and thorough examples. With that said, TFF continues to believe a
restatement will be the result of AutoChina’s aggressive accounting
policies. Sales-type lease accounting is reserved for manufactures that
have captive finance organizations. Manufacturers have historically used
sales-type lease accounting to recognize higher revenue and gross
profit on the sale of the equipment that they manufacture. Since
AutoChina’s value proposition is almost exclusively providing financing,
it is unclear how the company justifies an accounting treatment that
has historically been reserved for manufacturers. Management’s
explanation would have been accurate… had they also been a manufacturer
of the product to be leased. We believe the company’s new auditor PwC,
could confirm our view that the use of sales type lease accounting by an
independent finance company does not conform to GAAP.
discussion about sales-type lease accounting may prove moot given the
potential for it to go away. Recently, FASB identified lease accounting
as an area of “weakness” and proposed merging their accounting standards
with IASB (International). In August 2010, they issued an exposure
draft of the standard, with the final standard set to be released in the
next few months.[ix]
According to the Equipment Leasing and Finance Association, “this may
kill sales-type lease accounting. They want to use the finance lease
accounting method in IAS 17 for all leases.”[x]
Even AutoChina’s new auditors appear to side with TFF, “PwC
Observations: The performance obligation approach represents a
potentially significant change for lessors with sales-type leases under
current standards because, under this model, no revenue would be
recognized immediately; rather, it would be recognized over the lease
point is two-fold. TFF believes AutoChina is using an aggressive form
of gain-on-sale accounting with its sales-type lease methodology. This
accounting treatment has historically been utilized by firms with
financing and manufacturing arms under the same umbrella. AutoChina does
not have this structure. Second, it may be moot as oversight momentum
is building to eliminate sales-type lease accounting, which should speak
volumes about its overly-aggressive nature.
Reference C &D – Atrocious cash flow and massive capital needs
seems to be no disagreement between TFF and AutoChina management that
the company has atrocious cash flow characteristics today. However,
management seems to massage the rationale for the cash flows in their
letter by referencing a “typical vehicle lease, such as that for a
passenger car.” Management correctly points out that “the leasing
company never reaches cash flow breakeven during the lease.” We agree
with this statement. While true, this statement is irrelevant and
misleading when looking at AutoChina. The passenger leasing company
never reaches break-even on a passenger car, nor does it really matter
for the total economics of the manufacturer. The leasing company’s
economics must be viewed in conjunction with the manufacturing arm. This
abusive sales-type accounting allows the entity to show big profits on
day one of a lease. Comparing AutoChina to this model seems silly.
AutoChina’s sole business proposition is to make money on it leases. To
state that “it is impressive that we reach breakeven at all” suggests
that management is either clueless (which we do not believe), or is
gently providing a comparison that is not tremendously relevant.
way, AutoChina admits that in order to continue its game of growth,
they will need to continue to ramp originations. Examining the estimates
of Daiwa (we were unaware of their coverage until management’s letter),
the analyst appears to be assuming 20,625 new leases in 2011 for
At $38,000 per lease with
20% down (very conservative, we think it is substantially lower), AUTC
would need a remarkable $627 million of new funding. The company’s
investment portfolio will generate a small fraction of this amount.
|# leases||Ave COGS||$ Volume (mm)||Downpay||Cash needs (mm)|
Source: Daiwa and TFF analysis.
such, TFF believes that management desperately needs to secure new
sources of funds, or growth will stall. Where will this cash come from?
U.S. investors? Chinese banks that are under pressure to reduce
originations? After analyzing the most recent disclosures, TFF is
convinced that if the related party transactions slow, the future income
statement will be dramatically different – a fact that AutoChina chose
not to discuss in the numerous tables they provided.
Reference K& L – Related Party Debt
management’s response, TFF was extremely surprised to see the following
quote from the CEO, “Also, I am the Company’s second-largest related
party lender and have provided AutoChina with capital from entities of
which I own. I lend this to the Company at 0% interest cost to
AutoChina, on an unsecured basis, repayable on demand.”
Shockingly, TFF could only find disclosures for these “interest free” loans in a footnote in the company’s quarterly filings.[xii]
We may have missed the reference or disclosure, but we were unable to
find this disclosure in the company’s three earnings press releases
year-to-date. The fact AutoChina has been borrowing from related
party entities interest free, or even at below market rates,
significantly distorts the company’s normalized income statement and
overstates earnings. While there is nothing illegal with the CEO
making a decision to lend to AutoChina interest free, this should be
disclosed with every financial table so that investors understand that
AutoChina’s financial results are not comparable to other lenders based
upon the non-arms length loans.
would also point out AutoChina’s disclosure that highlighted Mr. Yong
Hui Li 21% ownership of Beiguo, a percentage that we referenced in Table
7. They failed however to even mention that he also owns 19.60% of the
equity interest of Renbai. They also neglected to mention that Thomas
Luen-Hung Lau, a director of AutoChina, is the indirect beneficial owner
of approximately 21.71% and 20.33% of the equity interest of Beiguo and
Renbai. Additionally, as a teaser for our next report, TFF has learned
that Yong Hui Li’s brother has a company that began extending credit to
AutoChina in 2011, a fact that was also left out of management’s
response. According to the most recent annual report, approximately
60-70% of the total commercial vehicle purchases made by AutoChina were
made pursuant to arrangements with Beiguo and Renbai.[xiii] TFF is currently waiting on more information on the crony Board that we look forward to sharing in our next report.
illustrate why the related party loans are such distorting factors, TFF
analyzed the P&L impact on AutoChina if related party rates
adjusted to market rates. The 4% interest rate that the company
discloses in their 20-F, should result in roughly $16 million in
annualized interest expense. At “market rates,” generously assumed to be
7% by TFF (200 basis points below recent securitization financing of
9%), the pre-tax difference based on our analysis would equal $0.74 per
share, or over 40% of the company’s 2010 earnings estimate.
|Annualized Interest Expense MM||Annualized Int Expense @ 7% MM|
|Amount Financed 9Ms MM||Amount Annualized MM||Interest Rate||EPS Impact|
believes AutoChina’s disclosure that it has only recognized $4.8
million of “related party interest expense” year-to-date raises other
questions. At a 4% interest rate, this implies only $158 million of
average related party debt. We could be missing something, but thus far,
we have not been able to reconcile this figure. TFF believes the
company is either significantly understating their related party debt or
has found a way to inexplicitly pay off the “$382.6 million” of debt it
discloses in its financial statements. Given the fact management also
used the $382.6 million figure in their letter (reference L), we wonder
out-loud how their related party interest expense would seem to imply a
much lower rate than that which has been disclosed.
Reference F & G – Minimal loan loss reserves
was a stickler when they asserted TFF contradicted itself when we
decried the company’s lack of reserves. TFF did not literally mean the
company had no loss reserves, although the actual number (which we
clearly cited) is not far from zero. We apologize if this was confusing,
and hope it does not blur our point. Based on TFF’s experience with
leasing companies, transportation finance, auto finance, and banks, we
believe AutoChina’s delinquencies and reserves are beyond abnormal. TFF
estimates a loan loss provision equal to just 50% of delinquencies would
be worth $0.28 per share, or over 15% of 2010 earnings per share.
Again, we look to the perverse earn-out as a possible explanation for
the aggressive assumptions management has utilized.
does believe that loan-to-liquidation value is well north of 100%
BEFORE the company lends fuel, tires and insurance. It is widely
accepted that any new car or truck loses a significant percentage of its
value the second it is driven off of the dealer’s lot. Additionally,
the reposition of a truck is expensive and time consuming, while the
losses generated by selling a truck in the secondary market can be
significant. As a result, TFF is skeptical about AutoChina’s statement
that it is providing “secured” financing for fuel, tires, and insurance.
history has generally shown that when a company can recognize profits
by simply providing a loan, there is very little incentive to
stringently underwrite a credit. This should sound familiar to anybody
that followed the mortgage catastrophe over the last decade. With that
said, TFF concedes it is possible AutoChina’s lending policies, and
claims of advanced screening tools, could be the driver of their unique
credit quality. TFF admits that we could be wrong and this time it may
indeed be different. However, the phrase “this time it’s different” is
usually another way to say “sell.”
Reference J- Restatement Likely
were critical towards the earn-out that AutoChina has endowed upon its
CEO. We would note that we have no opinion towards Mr. Li; he may very
well be a wonderful person and CEO. Our disdain is directed towards the
egregious nature of the earn-out, the unfavorable incentives and
dilution it has created, and the fact the treatment of the earn-out does
not appear to conform to GAAP accounting. Management’s defense of the
earn-out seems to imply that it is merit based. TFF reads the earn-out
very clearly, and this statement is true for determining the range of
dilution (5% – 20%). However, TFF believes it is very
misleading for management to state “Fact – The earn-out is subject to
certain EBITDA targets,” when in fact the earn-out seems to stipulate a
minimum of 5% dilution in new shares regardless of performance.
TFF believes management was not entirely sincere by failing to discuss
the absurdly low bogeys that the earn-out is based upon. AutoChina’s
earn-out is not based upon EBITDA targets that are reset annually.
Instead, the earn-out is calculated off of an abnormally low level of
projected EBITDA from 2009. With the initial bar set at artificially low
levels, 2011 EBITDA could come in $19 million below consensus
expectations (Daiwa) and still result in the maximum benefit for
CEO/dilution for shareholders of 20%. This 19% miss of expectations that
would still create 20% dilution does not exactly register as a
Herculean (or fair) bar for performance.[xiv]
management claims that the $57 million of stock issued to the CEO in
2010, and the $100 million of stock about to be issued to the CEO is not
compensation expense. Their rationale relies on the argument that the
earnout is “based on performance that is not tied to employment,” and
has an “original intent” that would compensate Mr. Li for EBITDA growth.
TFF continues to believe that AutoChina is incorrect. Accounting is not
static, nor is it based upon intent. EITF 95-8 clearly states that
earn-outs must be classified as an expense if management is not
compensated at levels consistent with “other key employees.” Young Hui
Li’s compensation of $1.00 per year is clearly not inline with other
employees. TFF believes that AutoChina’s compensation expense is
significantly understated because it does not include a realistic cash
comp figure for the CEO, nor does it include the earn-out that is
offered in lieu of cash compensation.
We’ll be back with much more in Report 2…
we respect the open dialogue AutoChina has demonstrated with the
investment community, our thesis still holds. TFF believes that when the
dust settles, AutoChina will be a single digit stock. As of January 24,
2011, the 72 companies in Roth Capital’s Chinese Investment Universe
Publication traded at 7.7x earnings. If AutoChina simply traded inline
with the broad Chinese universe, it would be $14 per share based upon
consensus estimates. Taking into consideration the possible 50%
dilution, the stock would be closer to $7.00 with an inline multiple to
the peer group. However, given the quantity of issues that TFF has
discussed, it would seem logical that investors would value AUTC at a
discount to its peer group (assuming the earnings do not vanish in a
restatement). TFF would point out that should bad debt increase, or
funding dry up, there are ample scenarios where AUTC equity could go to
zero. We believe the serious issues TFF has raised warrant investor
skepticism. It is the opinion of TFF that investors will suffer at least
50% downside from current levels.
[vi] Seminar: China’s Auditing and Financial Statements – Risks and Realities
The author of this article is short AutoChina stock. TFF goes to great
lengths to ensure that all information is factual and referenced. All
facts that we present herein are true to the best of our knowledge. All
opinions presented are our own and accurately reflect our opinion on the
relevant subject being discussed. We recommend that investors perform their own extensive due diligence before buying or selling any security.
One chart as usual does more to convey a simple message than all the Fed speeches equating the economy with the Russell 2000 ever could. Below we demonstrate the performance of three key market data points since the August Woods Hole speech: the performance of the S&P (via the ES), the price change in the 10 Year bond (TY1 inverse scale), and of course the change in non-farm payrolls (remember that old-school Fed mandate about full employment something something). Bottom line: the S&P is up over 30%, the 10 Year has plunged from over 126 to 118, while NFPs have added 392k, or 78.4 per month, nowhere near enough to even keep up with the natural growth of the labor force. So has QE been a success? We leave it up to readers to decide.
nd just to make the message even more clear, here is how the dollar, cotton, rice and wheat have traded since August. Pick your winners…
Indeed, as David Rosenberg discusses, the number of “winners” (among which the NFP most certainly is not), are many other asset classes, whose returns put the S&P to shame:
So Ben Bernanke focuses on equity valuations and yet there is a wide array of other “asset classes” that have been affected by the Fed’s massive liquidity infusion. Just as equity wealth has an indirect impact on spending, higher commodity prices squeeze margins for many producers and pinch real purchasing power for those households who are not owners of equity but have to fill their kids’ tummies nonetheless and find a way to get to work if they live more than a mile away. Looking at what food and energy has done since August; it would seem a little circumspect to be fingering Asian demand as the primary reason for the latest leg in the explosive commodity price rally.
Here we are, with 91% of all equity holdings in the United States held by the top 20% income group in the country. The top 1% own 38% of all the equity valuation. The lower 80% of the income strata own the asset class that the Fed wants so desperately to reflate (and with unmitigated success to be sure!). That same 80% are now being crushed by the indirect impacts of monetary policy — the ones that Bernanke dismisses — and are also ones that are seeing their cash flow drained by the surging gas and grocery bill. Geez — real wages deflated 0.5% in November, by 0.1% in December, and by what looks like at least 0.3% in January. The last time real work-based income fell three months in a row was when the economy was plumbing the recession’s depths from April to June of 2009.
Then again, who cares? No hedge fund investor does that is for sure (we don’t intend to be mean — that comment only covers the hours that the market is open). As long as Bernanke is juicing it up for the equity investor, and Uncle Sam is looking after the poor sucker with 99 weeks of unemployment insurance, 43 million food stamp recipients, and a nice dip into the Social Security Fund to finance a payroll tax cut, then all must be good and we must therefore have a sustainable recovery on our hands.
As we have said time and again, there will be a reward for being patient. After all, this equity rally has already achieved in 20 months what it took 60 months to accomplish from 2002 to 2007. In other words, double from the lows.
Friends — there is going to be day of reckoning. Trying to time it is futile. Just know it is coming and sooner than many think. Stop watching the talking heads on bubblevision and start boning up on the history of how post-bubble credit collapses end up playing out, especially once the government runs out of gas. Please don’t be tempted into the same mistake you may have made in 2007 and 2008 by jumping in too the riskiest parts of the markets at this juncture. In our view, it is currently appropriate to be focused on long-short strategies where an investor can manage or hedge out market risk and at the same time generate significant risk-adjusted returns. We understand what the market did from the 2009 lows, but we also know what they did from the 2000 highs. And the 2007 highs. Don’t be burnt thrice.
Over the past 3 days America has been battered by one after another apologist explaining just how good the employment data is if one strips out all the “bad”, and how all the “bad” can and should be stripped out by all patriots, and attributed solely to bad weather. For those who are beyond sick and tired of listening to this tripe, here is David Rosenberg once again telling it how it is. In summary: “The data from the Household survey are truly insane. The labour force
has plunged an epic 764k in the past two months. The level of
unemployment has collapsed 1.2 million, which has never happened before.
People not counted in the labour force soared 753k in the past two
months. These numbers are simply off the charts and likely reflect
the throngs of unemployed people starting to lose their extended
benefits and no longer continuing their job search (for the two-thirds
of them not finding a new job). These folks either go on welfare or they
rely on their spouse or other family members or friends for support.”
JOBS DATA REDUX — ADDING MORE MEAT TO THE BONE
It is laughable that everyone believes the labour market in the U.S.A. is improving. Lost in the debate over the weather impact was the benchmark revision to 2010 — overstated by 215k or 24%. The U.S. economy generated 909k jobs last year, which works out to just under 76k per month. That is insignificant considering that the population grew around 160k per month. The level of U.S. employment today stands at 130.265 million, which is where it was in January 2003.
The data from the Household survey are truly insane. The labour force has plunged an epic 764k in the past two months. The level of unemployment has collapsed 1.2 million, which has never happened before. People not counted in the labour force soared 753k in the past two months.
These numbers are simply off the charts and likely reflect the throngs of unemployed people starting to lose their extended benefits and no longer continuing their job search (for the two-thirds of them not finding a new job). These folks either go on welfare or they rely on their spouse or other family members or friends for support.
Meanwhile, it does look like real weekly earnings contracted in January for the third month in a row — that last occurred from April-June of 2009. Once the payroll tax cut effect fades and material cost pressures come to bear with a lag in margins the retail space will be squeezed hard.
Saving the day now are the payroll tax cuts but this effect wears off in Q2. Congress is about to cut spending and Bernanke doesn’t have a ton of support for QE2 from within the ranks. And the story ahead is one of profit margin squeeze more generally, though the market doesn’t yet see it.
WHAT DID THE U-6 UNEMPLOYMENT RATE DO?
We were asked about this on Friday because it was already known that it went from 16.7% to 16.1% — everyone wants to believe that this is a harbinger of labour market tightening. But it may be time for a reality check. The broad U-6 jobless rate measure was 8.8% when the recession began, was 9.0% when Bear Stearns failed, 10.5% when Fannie and Freddie imploded, 11.9% when AIG was taken over, Lehman failed and Merrill taken over, and 15.6% when the stock market hit its cycle low.
There’s also some seasonal adjustment quirks because of the massive increases in the raw unemployment data in January 2010 and January 2009 and the current seasonal factors are most sensitive to smoothing out what happened in the same month of the past two years. In January 2009, the U6 spiked 1.9% on a nonseasonally adjusted basis and in January 2010 it rose 0.9%. So the seasonal factors now were looking for an increase of 1.4% and instead it comes in at +0.7%, which on a raw basis is pretty normal for January, and it gets translated into a decline to 16.1% from 16.7%. Remember, the raw data showed an increase to 17.3% from 16.6%.
Nobody seemed to know what to do with the job data on Friday due to weather. It’s interesting that the storms seemed to have little effect on the ISMs or chain store sales, but everyone believes that just because a bunch of folks didn’t make it into the office in January the impact is probably hugely exaggerated. We saw an economist quoted on the front page of Investor’s Business Daily stating so arrogantly that he is “comfortable” with the view that the snow subtracted 100k from nonfarm payrolls in January. Even if true that would still be 138k, which is still abnormally weak for this stage of the cycle, not to mention still quite a bit below the post-ADP whispered estimates of +180k.
This U.S. labour market is still one sick puppy. The fact that 2.8 million Americans said they had given up on their job search in January was overshadowed by the debates surrounding the weather impact on the headline. Talk about being small-minded and totally myopic on the small picture. Then again, we have to admit that is what drives speculative rallies — the “noise” in the data. Of all the analysis we saw over the weekend, the only one that made any sense was the editorial by Bob Herbert on page A15 of the weekend NYT:
“The policy makers who rely on the data zealots are just as detached from the real world of real people. They’re always promising in the most earnest tones imaginable to do something about employment, to ease an awful squeeze on the middle class (policy makers never talk about the poor), to reform education, and so on.
They say those things because they have to. But they are far more obsessed with the numbers than they are with the struggles and suffering of the real people. You won’t hear policy makers acknowledging that the unemployment numbers would be much worse if not for the millions of people who have left the work force over the past few years. What happened to those folks? How are they and their families faring.
The policy makers don’t tell us that most of the new jobs being created in such meager numbers are, in fact, poor ones, with lousy pay and few or no benefits. What we hear is what the data zealots pump out week after week, that the market is up, retail sales are strong, Wall Street salaries and bonuses are streaking, as always, to the moon, and that businesses are sitting on mountains of cash. So all must be right with the world.
Jobs? Well, the less said the better
What’s really happening, of course, is the same thing that’s been happening in this country for the longest time — the folks at the top are doing fabulously well and they are not interested in the least in spreading the wealth around.
The people running the country — the ones with the real clout, whether Democrats or Republicans — are all part of this power elite. Ordinary people may be struggling, but both the Obama administration and the Republican Party leadership are down on their knees, slavishly kissing the rings of the financial and corporate kingpins.”
Look, these are just excerpts for your convenience. The whole column just oozes with the truth — the true state of the labour market that is widely dismissed.
As a trusted and loyal reader notified us on Friday after the data were released and the consensus view out of the bond market was how reflationary this labour market report was, the civilian population rose 1.872 million last year. At the same time, the labour force fell 167k. Those not in the labour force soared 2.094 million. Just in January, we saw 319,000 people drop out of the work force. These numbers are incredible. This is a highly dysfunctional labour market. People are falling through the cracks at an alarming rate as they come off their extended jobless benefits — “doubling up” as Bob Hebert put it — and we have traders and economists debating the weather effects of a nonfarm payroll data-point that will most assuredly get revised no fewer than three times in the next couple of years.
It’s incredible how the masses of pundits have responded to the data.
Real labour compensation contracted at a 0.6% annual rate in Q4, and since the recession technically ended, it has shrunk in four of the last six quarters. How is this the hallmark of a well functioning labour market? We can see now how this environment has been wonderful for equities:
So the corporate sector has been receiving tremendous support from the government. All the while, the acute anxiety among the working class has allowed companies to continuously cut unit labour costs, which in turn has prompted a V-shaped recovery in profit margins.
Now what about the top-line? We just saw in those Q4 productivity numbers that came out for Q4 that the price deflator for the nonfarm business sector actually fell at a 0.9% annual rate. But, you see, companies don’t have to worry about that — they can afford to keep prices down because not only can they cut labour costs quite easily in this environment, but the federal government is ensuring that people still get paid even if it’s not from their employer. We have a situation now where a record near-20% of total personal income is coming in the form of government assistance, whether that be in Social Security, food stamps, or the unprecedented expansion of jobless benefits.
But to be calling for a labour market recovery when real compensation per hour is declining at a 0.6% annual rate is just slightly a case of looking at the situation through rose-coloured glasses. Just a tad.
Watch My LIVE Broadcasts (On-Demand): www.livestream.com Add me as a friend on Facebook! www.facebook.com Get DAILY GrowBy10 Updates on Twitter! twitter.com Aug. 10 (Bloomberg) — The collapse in commercial real estate is preventing Federal Reserve Chairman Ben S. Bernanke from declaring the economy and financial markets are healed. Property values have fallen 35 percent since October 2007, according to Moodys Investors Service. Thats making it tough for owners to refinance almost $165 billion of mortgages for skyscrapers, shopping malls and hotels this year, pressuring companies such as Maguire Properties Inc., the largest office landlord in downtown Los Angeles, to put buildings up for sale. Negative Fundamental Demand for commercial space comes from employment and the income generated by that employment, said University of Pennsylvania Professor Joseph Gyourko, director of the Wharton Schools Samuel Zell and Robert Lurie Real Estate Center in Philadelphia. Mounting job losses are a really significant negative fundamental, signaling that conditions are going to be tough for the industry for a while, he said. That may spill over into mounting losses at some banks. Forty-seven percent of loans at the 7000-plus smaller US lenders are in commercial real estate, compared with 17 percent for the biggest banks, according to New York-based Goldman Sachs Group Inc.
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