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In late April, Mitchell Langbert, an associate professor at Brooklyn College, published a study on ideological homogeneity at liberal arts colleges in the journal Academic Questions. His findings confirm what many right-wingers have been whispering—and shouting—about for a while now: nearly 39 percent of the colleges sampled are Republican-free, in terms of faculty ideological makeup, writes Liz Wolfe.
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Excerpted from Glenn Greenwald’s excellent article at The Intercept…
FORMER ECUADORIAN PRESIDENT Rafael Correa, in an exclusive interview with The Intercept on Wednesday morning, denounced his country’s current government for blocking Julian Assange from receiving visitors in its embassy in London as a form of “torture” and a violation of Ecuador’s duties to protect Assange’s safety and well-being.
Correa said this took place in the context of Ecuador no longer maintaining “normal sovereign relations with the American government — just submission.”
…
The danger for Assange thus remains high if were to leave the embassy, particularly in light of a highly threatening speech given last year by Mike Pompeo, then U.S. President Donald Trump’s CIA director and now his secretary of state, in which he labeled WikiLeaks a “non-state hostile intelligence service,” denied that its publication of documents is protected by the First Amendment, and vowed that “to give them the space to crush us with misappropriated secrets is a perversion of what our great Constitution stands for. It ends now.”
In January, doctors who examined Assange inside the embassy warned that continued confinement posed grave threats to both his physical and mental health. Assange’s mother said earlier this week that his health was “rapidly deteriorating” and had become “extremely dangerous.”
CORREA CITED those facts, as well as Ecuador’s legal obligations under international law to asylees, to denounce Ecuador’s denial of visitors to Assange as “basically torture.” Denial of visitors is, Correa said, “a clear violation of his rights. Once we give asylum to someone, we are responsible for his safety, for ensuring humane living conditions.” But “without communications to the outside world and visits from anyone, the government is basically attacking Julian’s mental health.”
The ex-president said he believed it could be appropriate to limit Assange’s communications if he were acting “irresponsibly” by interfering in another country’s politics. During the 2016 U.S. election, Correa said, his own government told Assange that it thought his attacks on Hillary Clinton were becoming excessive and briefly suspended his internet connection to underline its concerns.
“But that was just temporary,” said Correa. “We never intended to take away his internet for an extended period of time. That is going way too far.” Correa’s Foreign Affairs Minister Guillaume Long similarly said in an interview with The Guardian earlier this morning that he, too, believed that the denial of visitors to Assange and the blocking of his internet access for this long — believed to be due to Assange’s frequent tweeting over the Catalan independence movement in Spain — was unjust.
As for reports that Ecuador is negotiating with the U.K. government to turn over Assange, Correa said that he had no knowledge of those discussions, but said it would be “unthinkable” for Ecuador to do so without first obtaining enforceable protections for Assange’s rights, including not having the U.K. government use the bail violations as a pretext to hand over Assange to the U.S.
Emphasizing that the U.S. government has made clear that it wants to prosecute Assange for publishing newsworthy material under statutes that allow for the death penalty, Correa said any such deal that did not include protections against extradition to the U.S. would be “a terrible betrayal, a violation of the rules of asylum, and a breach of Ecuador’s responsibility to protect the safety and welfare of Julian Assange.”
…
Correa continues to believe that asylum for Assange is not only legally valid, but also obligatory. “We don’t agree with everything Assange has done or what he says,” Correa said. “And we never wanted to impede the Swedish investigation. We said all along that he would go to Sweden immediately in exchange for a promise not to extradite him to the U.S., but they would never give that. And we knew they could have questioned him in our embassy, but they refused for years to do so.” The fault for the investigation not proceeding lies, he insists, with the Swedish and British governments.
But now that Assange has asylum, Correa is adamant that the current government is bound by domestic and international law to protect his well-being and safety. Correa was scathing in his denunciation of the treatment Assange is currently receiving, viewing it as a byproduct of Moreno’s inability or unwillingness to have Ecuador act like a sovereign and independent country.
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Authored by Veronika Rinecker via CoinTelegraph.com,
Apple’s co-founder Steve “Woz” Wozniak has commented positively about cryptocurrencies and blockchain technology in his opening speech at the WeAreDevelopers World Congress 2018 in Vienna, Austria.
image courtesy of CoinTelegraph
According to a report by Cointelegraph auf Deutsch Wednesday, May 16, Wozniak considers blockchain to be a “great idea.” He further said:
“[Blockchain] is the next major IT revolution that is about to happen.”
Wozniak explained his positive outlook on blockchain by the fact that there are many useful applications for the technology in a number of areas.
The blockchain and cryptocurrencies will achieve their full potential in a decade, according to Wozniak. Apple’s co-founder quoted CEO of Twitter Jack Dorsey, who had said in March that Bitcoin will become the world’s “single currency.”
This is not the first time that Steve Wozniak has made positive comments about cryptocurrencies and blockchain. At the “Money 20/20” conference in Las Vegas, back in October last year, he saidthat Bitcoin is better than gold and the US dollar.
According to Wozniak, Bitcoin’s big advantage is that there is only a limited amount of coins, while fiat money, like the US dollar or euro, can simply be printed by banks.
Nonetheless, Wozniak sold all his bitcoins except one, as he said at the WeAreDevelopers Conference in Vienna, because “[he] does not want to be an investor and constantly watch the prices.”
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Following our discussion of Europe’s angry response to Trump’s unilateral Iran sanctions, in which European Union budget commissioner, Guenther Oettinger made it clear that Europe will not be viewed as a vassal state of the US, stating that “Trump despises weaklings. If we back down step by step, if we acquiesce, if we become a kind of junior partner of the US then we are lost”, moments ago Reuters reported that the European Commission is set to launch tomorrow the process of activating a law that bans European companies from complying with U.S. sanctions against Iran and does not recognise any court rulings that enforce American penalties.
“As the European Commission we have the duty to protect European companies. We now need to act and this is why we are launching the process of to activate the ‘blocking statute’ from 1996. We will do that tomorrow morning at 1030,” European Commission President Jean-Claude Juncker said.
Speaking at news conference after a meeting of EU leaders in Bulgaria, Juncker added that he “also decided to allow the European Investment Bank to facilitate European companies’ investment in Iran. The Commission itself will maintain its cooperation will Iran.”
Europe’s hardline position will infuriate Trump, as Brussels effectively nullifying US sanctions will prompt a violent outburst from Trump, who needs Europe on his side for US sanctions of Iran to have any chance of succeeding.
Perhaps sensing what is coming, French President Emmanuel Macron took a slightly softer tone, and said that the nuclear deal with Iran should be supplemented and it is necessary to continue negotiations, including on missile program.
The French president said that “the European Union decided to preserve nuclear deal and defend EU companies” adding that “our main interest in Iran is not in trade, but in ensuring stability in the region, at the same time, we will not become an ally of Iran against the US.“
“We’ve had a vibrant discussion on Iran. The 2015 nuclear agreement is a crucial element of peace and security in the region. We have opted to support it whatever the US decides to do,” said the French president on arrival at the Sofia summit. “We have pledged to take necessary political steps for our companies to stay in Iran.”
Macron also said that the nuclear deal with Iran must not only be preserved, but also supplemented and expanded to include ways to solve the missile problem and questions about Iran’s role in the region.
“International companies with interests in many countries make their own choices according to their own interests. They should continue to have this freedom,” he added, making it clear that European companies will not be subject to US sanctions, even if that decision is ultimately up to the US.
But the most accurate observations by Macron was that Trump’s Iran decision strengthens both Russia and China in the region, something we pointed out weeks ago, begging the question whose interests is Trump representing.
And now that Europe has openly rebelled against Trump’s sanctions, one wonders how long before the selling in oil resumes, as it is becoming increasingly clear that unlike 2012, Europe – and most of Asia – will continue buying Iranian oil, suggesting that the decline, if any, in Iranian exports will be a few hundred thousands barrels at most, a number which we expect will shrink to 0 as Iran offers increasingly preferential prices to its non-USD paying clients, especially now that Asian oil demand is soaring.
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Authored by Doug Kass via RealInvestmentAdvice.com,
“Men, it has been well said, think in herds; it will be seen that they go mad in herds, while they only recover their senses slowly, one by one.” – Charles Mackay, Extraordinary Popular Delusions and The Madness of Crowds
The Bull Market in Complacency has resurfaced. Reject it and consider derisking, now.
I find myself, after a period of being long of equities, back in the bearish minority again – and I moved back into a net short exposure late in the day on Friday.
And, I observe, that many of the same investors who were bearish at the February lows are now bullish at the recent mid-May highs.
Fear of a large drawdown seems to have been all but eliminated in the eyes and thoughts of market participants as the Bull Market of Complacency seems to have reappeared.
2017 was a year of hope and anticipation (in large measure because of the optimism surrounding lower corporate tax rates) as price earnings ratios expanded by almost three multiple points. Interest rates were still suppressed and volatility was at historic lows. Last year was one in which Wall Street recovered and prospered better than Main Street.
In 2018, markets are more or less unchanged as the reality of instability and inconsistency of policy and economic uncertainty have reemerged. This year, unlike last year, Main Street has thrived and Wall Street has stagnated. And a new regime of volatility has emerged, coincident with a general rise in interest rates – particularly in maturities of ten years or less.
Let me summarize my top ten, current market concerns:
1. A tug of war between fiscal expansion and monetary contraction seems likely to be won by Central Bankers in the year ahead. History proves that the monetary typically wins out of the fiscal particularly since there are legitimate concerns whether the tax cuts will “trickle down” to the consumer. Moreover, we are at a tipping point towards higher rates (in the U.S. and elsewhere) after nine years of interest rate repression in which the accumulation of debt in both the private and public sectors are at record levels. Not only has the Fed turned, but each day gets us a day closer to the end of ECB QE. (The Italian 2 year yield went from -.265% to -.10% in one day). So, risk happens fast when a massive bubble has been created.
2. There is a growing ambiguity in domestic and non US high frequency economic data. Citigroup’s Global Surprise Economic Index has turned down and Citigroup’s EU Surprise Index is at a two year low. U.S. data (ISM, PMI and others) have often failed to meet expectations. Reports are that retail started the quarter weakly and, this morning, retailer Home Depot (HD) missed consensus comp views.
A flattening yield curve is endorsing the notion of late cycle economic growth. And, according to my calculus, the yield on the ten year U.S. note (given current inflation breakevens) implies U.S. Real GDP growth below +1.70%/year.
3 . The rise in global interest rates may continue – providing a reduced value to equities (on a discounted dividend model) and serving as a governor to global economic and US corporate profit growth. C.I.T.A. (“cash is the alternative) is getting busy while T.I.N.A. (“there is no alternative”) seems to be without a date to the prom this spring.
For the first time in 12 years the yield on the three month U.S. Treasury note now exceeds the dividend yield of the S&P Index:
Meanwhile, the six month Treasury bill yields over 2% (2.09% this morning) and the two year Treasury bill’s yield is over 2.55%.
Inflation, too, is likely at a multi-year infection point.
I continue to view June/July 2016 as The Generational Low In Yields. Non US yields are at even more unjustified levels and will lead to large mark to market losses over the next few years – imperiling retail and institutional investors and banks in Europe that have leveraged positions in over-priced fixed income. (Just look at Argentina, a country that has defaulted on its sovereign debt on eight separate occasions – most recently in 2001. As a measure of lameness, investors scooped up 100-year Argentina bonds last June).
Bonds are in year two of a major Bear Market – fixed income (of all types) are overvalued.
4 . The Orange Swan represents clear risks for the equity markets and for the real economy. As I have written in my Diary and stated on Fox News yesterday afternoon, hastily crafted tweets by the White House are dangerous in a flat, networked and interconnected world. The inconsistency of policy (which seems to be designed and conflated with politics as we approach the mid-term elections) seems to be weighing on business fixed investment plans which, I have learned through many of my corporate contacts, are being deferred (and even derailed) in the face of uncertainty and lack of orthodoxy and inconsistency of the delivering policy by “The Supreme Tweeter” who resides in Washington, D.C.
5 . Investor sentiment has grown more optimistic and fears of a large drop in stocks has been all but disappeared.
6 . Technicals and resistance points mark a short term threat to stocks. Not only has the market risen for eight consecutive days but an important Fibonacci point has been been met (from the January highs). As well, the S&P Index is now at the 2725-2750 resistance level – the upper end of the recent trading range. Yesterday, the lynx-eyed David Rosenberg remarked, on CNBC, that on breadth and volume the rally has been less powerful than recent rallies.
7 . The dominance of passive and price momentum based strategies are exaggerating short term market runs –contributing to a false sense of investor security. Though our investment world exists as buyers live buyer and sellers live lower, beware of a change in momentum that can turn the market’s tide.
8 . After nearly a decade, both the market advance and a sustained period of domestic economic growth have grown long in the tooth.
9. Though market valuations are high they are not too stretched – but other classical market metrics (equity capitalization to GDP, price to book, price to sales) are very stretched.
10. A new regime of volatility, seen recently, might signal a change in market complexion.
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In June, Kentucky will become the first state to require a presumption of equally shared parenting in child-custody cases even when one or more parents is opposed. While it’s common for states to prefer joint custody when both parents are amenable, Kentucky’s presumption will apply even without divorcing parents on board.
Kentucky Gov. Matt Bevin signed the measure in April, declaring that judges must presume “that joint custody and equally shared parenting time is in the best interest of the child” in almost all divorce cases. Last year, Kentucky required the same presumption for temporary child-custody cases while divorce is pending.
Exceptions exist for situations “involving an incident of domestic violence within the preceding three years” or where “there has been a domestic violence order entered” or being entered.
A Slow Shift
As of 2012, nearly half of American states stipulated a presumption or preference for joint custody in cases where parents agreed to it, according to “The Roller Coaster of Child Custody Law over the Last Half Century,” published in the Journal of the American Academy of Matrimonial Law.
“A gender-neutral standard for custody was promoted by both feminists and fathers’ rights groups,” writes author Mary Ann Mason.
But even in states with such guidelines, old ideas about the superiority of mothers as caregivers have led to courts favoring maternal custody. Fighting for a presumption of joint custody in law and practice has been a primary goal of the fathers’ rights movement.
More than 20 state legislatures in 2017 considered bills “that would encourage shared parenting or make it a legal presumption,” notes The Washington Post Almost 20 related bills cropped up in 2015, too.
Despite all this attention, however, few of these bills have fared well, and those that did advanced more incremental changes (such as an Oregon law expanding the number of weekend days a non-custodial parent could visit their children) rather than creating a complete presumption of shared custody.
A ‘Radical’ Step?
“A presumption is a pretty radical step,” Maritza Karmely of Suffolk University Law School told the Pew Research Center (PRC) in 2016. “That assumes that shared parenting works for most families, and I think that is an enormous assumption.”
Pew points out that most child custody cases won’t go before a judge: only about 10 percent are actually settled in court. “Cases that judges do hear are more likely to be ones in which parents can’t communicate or cooperate to make decisions,” it says, and “in those high-conflict situations, some researchers have warned that joint custody may be harmful to a child’s well-being.”
But fathers’ rights activist and National Parents Organization founder Ned Holstein has repeatedly dismissed fears that joint custody laws will lead to unfit fathers raising kids.
Under the new Kentucky law, judges are still allowed to use their discretion and can decide against joint custody in cases where it’s impractical or against the best interest of a child.
In other words, the shift doesn’t mean that judges necessarily will grant shared custody to parents in all or most custody cases. It simply says that the state shouldn’t automatically consider mothers more fit to raise children (as it did for much of the 20th century) or that fathers have more “ownership” right in children than mothers do (as was common in the era prior to supposed maternal supremacy).
America’s current child custody laws “were based on the sexist belief that mothers are better than fathers at raising children,” Wake Forest University psychology professor Linda Nielsen told the Post last year. “Well, the research does not support that.”
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A proposed tariff on ovens used for baking biscuits and proofing bread, Brian Smith tries to explain, would place “little if any pressure” on China to change its trade practices. All it will do, the CFO of Washington State-based LBC Bakery Equipment says, is make it more expensive to buy and maintain the ovens—and will increase the price of everything that comes out of them.
Smith is the 89th person to address The Office of the United States Trade Representative’s special committee on tariffs this week. Nearly all of them deliver the same message: If the United States goes forward with plans to place tariffs on hundreds of Chinese-made goods, the committee is told over and over and over, it will be American businesses and consumers who bear the brunt of the damage. Smith gets five minutes to say his piece, just like the dozens of business owners who went before him and the dozens more scheduled to come after.
This week’s hearings are something out of a version of Atlas Shrugged penned by Franz Kafka. It’s a glimpse into a world where business success depends on currying favor with the government—at least enough of it to avoid the president’s trade hammer—and where doing so requires pleading your case in a pallid courtroom within a boring office building on E Street SW. Do the sleepy-eyed bureaucrats listening know that you are any different from the 88 people who already spoke? Ding, your time is up. Next, please. And so on down the line.
The procedure is a reflection of just how many number people have come to D.C. this week to speak against the tariff proposal—or, as is often the case, to ask for exemptions for specific items. Three days are hearings are scheduled. The sheer volume of the opposition almost gets lost within the rote, monotonous process.
No cameras are allowed inside Courtroom A and streaming of the hearing is forbidden. The Office of the U.S. Trade Representative promises that a transcript will be made available, eventually. Even if video was provided—as it should be, since this isn’t a court of law but supposedly an open, democratic process—it’s not the sort of thing that would pull down record ratings on C-SPAN. But it is something that people should watch, because it’s hard to imagine how anyone who identifies as a small-c conservative or small-l liberal would not be disturbed by it. If not by the process, then by the underlying policy, which is not acurately described as either conservative or liberal but rather as centrally planned economics wrapped in jingoism.
This exercise in democracy is happening because President Donald Trump called for imposing a 25 percent import tax on roughly 1,300 Chinese goods, and laying those tariffs requires approval from the U.S. Office of the Trade Representative’s interagency Section 301 committee, which includes one official from all the major departments and agencies in the federal government. Allegedly, those tariffs will bully China into being a better trading partner, or at least will convince its government to stop stealing American intellectual property. How a 25 percent tariff on bakery ovens or wrenches will prevent China from coping our notes about microchips and AI remains unclear.
“Our products are hardly new technology or subject to fears about intellectual property theft,” says John Constantine, president of Apex Tool Group, a North Carolina company that sells wrenches, ratchets, and other hand tools.
Ratchets have been around for more than a hundred years. Wrenches for longer than that. Both are simply variants on one of the oldest tools in the history of mankind. Constantine’s company has nothing to gain from the imposition of tariffs designed to stop the theft of uniquely American intellectual property. There is no tariff plan that allows him to win, only variations on how badly he will lose. His company must be sacrificed to appease an angry president who does not understand trade.
Still, they try. Michael Kersey, owner and president of the American Lawn Mower Company, talks about how tariffs could produce a shortage of the parts his business needs to make various consumer products. In the event of a bad winter, a shortage of snowblowers could be a particularly serious problem for the independently living elderly, he stresses, as if a shortage of any product is not significant unless it can be shown to negatively affect a protected class of people. Such thinking is necessary, of course, only when government is involved.
John Hoff, president of Global Point Technology, an upstate New York company that designs and sources manufacturing components, says his company pays more than $40,000 in import taxes every year. Trump’s proposal would increase that amount to more than $1.3 million. “Imposing these tariffs would not be punishing a Chinese company,” he says. “It would be punishing a U.S. company.” There are at least 14 items—each with it’s own eight-digit code, as all U.S. imports have—on Trump’s list that Huff says his company regularly purchases from China. Given the time constraints, he only has time to talk about two of them: numbers 84799040 and 32906180—or was it 32906810?
You cant help but feel for Hoff, Smith, and the rest as they are shuffled through the process. It’s not necessarily because some of them might be put out of business by the stroke of a presidential pen. There’s that too, of course, but what really sticks with you is the way they’re forced to humiliate themselves.
These are people who have built and run companies, large and small, that survive because they provide some necessary value to someone—directly to consumers in many cases, but often to other businesses along the supply chain. They employ people, sometimes hundreds and sometimes just a dozen or so, who are able to put food on their tables every night thanks, in some small way, to a global supply chain. Yet here they are, paraded one by one in front of a small microphone under pale florescent light to prostrate themselves before a bunch of unelected officials and beg for the survival of their businesses and their employees’ livelihoods.
“We have no ability to compete with a 25 percent tariff on our supplies.” “It will run us right out of business.” “It’s a competitive market; margins are small.”
The humiliations don’t end there, because of course there must be a periodic question and answer session, to give the impression that the committee is listening to what’s being said.
What other foreign sources could you consider using as suppliers, committee members ask easily more than a dozen times. Have you thought about ways to change your supply chain to avoid the tariffs? If it were only that simple, come the replies. Hoff’s company in upstate New York owns part of a factory in China. Moving it would be prohibitively expensive. Nearly the entire world’s supply of component parts for microscopes come from China, explains Ernest Tai, president and CEO of LW Scientific, an Atlanta-based medical device manufacturer. “We would not be able to move our sourcing out of China, period,” he says. Costs would be higher elsewhere. Investments have been made. One after another, the businessmen and women show that, yes, they have considered those options and, no, they are not sufficient.
“Is your company in a position to source products from other countries?”
Rather than demonstrating enlightenment, though, the questions merely confirm how right Friedrich Hayek was when he diagnosed The Knowledge Problem. No government official can know as much about a business as the people who run it, but that wont stop them from meddling. Or, as is the case today, from asking pedantic questions.
What will all this accomplish? Probably nothing.
Take, for example, what Jason Oxman, president of the Electronic Transactions Association, tells the committee about cash registers—another of the hundreds of items on Trump’s tariff list. There are more than 55 million Chinese-made cash registers and payment devices shipped around the world every year, but only 10 percent of them are imported into the United States. The proposed tariffs would force American businesses to pay higher prices for new cash registers (and in the midst of the ongoing upgrade of registers to accept chip cards and mobile payments) but the loss of a small portion of U.S. sales would hardly put a dent in Chinese manufacturers, and they would easily make up the difference in other markets.
Trump’s tariff plan might start a trade war between the U.S. and China. It might draw the European Union into the conflict too. It might cost hundreds of thousands of American jobs and drive up prices for just about everything Americans buy. For now, though, it’s already imposing unseen costs on American businesses, large and small, and forcing business leaders to play politics just so they can get back to doing what’s actually important.
“Believe me,” Constantine says, in response to another repetitive question from the committee about how tariffs would affect his bottom line, “I’ve had to learn more about this than I ever wanted to know.”
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Just when you thought that after the last criminal offense by Wells Fargo (which as a reminder was pushing customers into higher-fee retirement accounts), surely there was no way Warren Buffett’s favorite criminal organization would be caught again engaging in some even more bizarre criminal activity.
Alas, it was not meant to be as Wells somehow always finds a way, and moments ago the WSJ reported that in the latest scandal involving America’s largest mortgage lender, “some employees” in Wells Fargo’s business banking, aka “wholesale” unit and is separate from Wells’ retail division, improperly altered information on documents related to corporate customers without their knowledge.
The Information adjusted by Wells employees varied from social security numbers to addresses to dates of birth for people associated with business-banking clients, with the bulk of incidents reportedly taking place in 2017 and early 2018, as Wells Fargo was trying to meet a deadline to comply with a regulatory consent order related to the bank’s anti-money-laundering controls.
In other words, to comply with regulations against fabricating client data, Wells… fabricated client data.
The employees were also working to get documents in order prior to new requirements from another regulator for disclosures related to proof of beneficial ownership of businesses, the WSJ added. Wells Fargo only became aware of the behavior in recent months from employees and is still investigating the matter.
While a Wells Fargo spokesman told WSJ the bank doesn’t comment on regulatory matters, he said that “this matter involves documents used for internal purposes,” and added that “no customers were negatively impacted, no data left the company, and no products or services were sold as a result” although we are confident the the upcoming congressional hearings may reveals something else.
“Over the past several months we’ve built more robust internal processes that reinforce our values, and if we find any situations where behavior violates those values, we take swift action to correct.”
Processes, such as this one, in which the bank fabricated corporate customer data.
The altering of information within the business-banking division of Wells Fargo, which serves small firms with annual sales ranging from $5 million to $20 million, comes as the bank is continuing to grapple with the fallout from the sales-practices scandal that erupted in September 2016. That involved bank employees fabricating information to open as many as 3.5 million accounts without customers’ knowledge or authorization.
Regulators subsequently sanctioned Wells as more problems have emerged. Wells Fargo agreed to a $1 billion settlement with two of its main regulators in April, which forced the bank to adjust reported first-quarter earnings by $800 million. The settlement focused on risk-management failures that led to improper charges to mortgage and auto-lending customers.
Following the news, Wells Fargo stock has slumped, and is the worst performer in the KBW bank index, falling as much as 1.5% in early trading.
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Elon Musk may be certain that Tesla will not need to raise capital again, but this morning Goldman disagreed violently, and in a note by bank analyst David Tamberrino, it sees “Tesla coming back to the debt/equity markets to fund growth”, and forecasts that between Tesla’s current operations, anticipated new product spend, and incremental capacity additions, the electric car company would need over $10bn in external capital raises and debt re-financing by 2020 (and that assumes the NHTSA, which is now probing three separate Tesla incidents, does not enforce a recall).
The good news: according to the Goldman analyst Tesla still has full access to capital markets, and has several options available to fund its growth targets and refinance maturing debt and raise incremental funds, meaning that Musk may fund the massive capital shortfall through multiple avenues, “including new bond issuance (secured and/or unsecured), convertible notes, and equity.”
The not so good news: issuing incremental debt (including priming current creditors with secured debt) may weigh on the credit profile of the company while issuing additional equity or convertibles at lower premiums would dilute current shareholders.
Jumping to Goldman’s candid assessment, which will hardly please Musk, meaning that Tamberrino will find himself in the penalty box on the next few Tesla conference calls, the analysts recemmends that Goldman clients “express long views via the front-end convertible credit” while they “continue to express a bearish view on the equity.“
Now back for some additional details.
First, looking at Tesla’s current capital structure, Goldman notes that TSLA currently has a total of $10.5bn in debt, $3.1bn of which is issued by subsidiaries and classified as non-recourse beyond the specific issuers’ assets, and $7.4bn of which is recourse debt, which primarily consists of the company’s revolving credit facility, convertible bonds and straight bonds.
This is where things get complicated, because according to Tesla’s debt maturity schedule, between 2018 and 2022, the company has $1.5bn in non-recourse debt maturing, on top of $5.5bn in recourse debt.
As the company’s new 5.3% 2025 indenture generally does not limit TSLA from placing liens on Asset Financing Transactions (i.e., accounts receivables, residuals, and vehicle lease agreements) and allows for the refinancing of existing Subsidiary Debt without requiring the 2025 notes to be similarly guaranteed, TSLA should be able to refinance the majority of its non-recourse debt on similar terms as the existing. Therefore Goldman focuses primarily on the company’s recourse debt maturity schedule and the potential avenues the company has to refinance.
Tesla’s debt maturity aside, the biggest drain of cash of course, is the company’s unprecedented CapEx needs. Here’s Goldman’s math:
Based on our model, we forecast Tesla could require approx. $10.5bn in capital transactions between now and 2020 in order to (1) re-finance $3.1bn of out-of-the money convertible notes and revolving debt coming due, (2) fund ongoing operations (where we forecast a continued FCF drag), and (3) put new plant capacity in place in China (note: we presently do not include potential China plant capex in our model).
We believe the debt markets likely would let TSLA lever up to a range of 4.0x to 5.0x gross debt to 2020E EBITDA (similar to NFLX), but this would still require $2bn in equity capital (Exhibit 4). Under an upside scenario where Tesla achieved its targets (i.e., sustainable 5k/week production in 2H18 that increases to 10k/week in 2020 and Model 3 gross margins of 25%), we believe the total capital transaction amount would be approx. $5bn —and the company would likely be able to fund its growth with debt.
In addition to the scenario above, Goldman notes that several other options exist outside the two presented below in Exhibit 4. As a result, the GS analyst provides a sensitivity analysis on the total amount of debt (i.e., incremental debt + refinance amounts) that Tesla may require for growth through 2020 in Exhibit 5.
The analysis takes into account the company’s Model 3 production ramp and sensitizes its sustainable weekly production rate in 2020 (using GSe 5k/week at the bottom end of the range, and the company’s ultimate goal of 10k/week at the top end of the range) vs. the Model 3 gross margins (using 20% at the bottom end — near GSe of 21% Model 3 gross margins in 2020, and the company’s target of 25%).
Putting this together, Goldman currently forecasts $2bn in equity raises through 2020 —in addition to incremental warehouse financing/revolver draws “with multiple avenues of continued business development (Model Y, Semi truck, Solar Roof, Powerwall and Powerpack sales)— in addition to capital needs to continue ramping Model 3 production and at the gigafactory, we believe TSLA’s capital expenditures likely step-up from 2018E $2.9bn in 2019 and 2020 (GSe of $3.6bn each year).”
When combined with our expectation for a slower-than-targeted production ramp of the Model 3, we believe that Tesla may issue equity (in addition to borrowing on its revolving lines) in order to fund operations and maintain minimum cash balances above $2bn (Exhibit 3). Within our forecast, we assume two equity raises of $1bn each to occur in 4Q18 and in 3Q19 —one quarter ahead of our forecast for minimum cash levels to fall below $2bn.
But the biggest cash drain, according to Goldman, would be any “new capacity additions abroad” which would drive the bulk of incremental cash needs:
Tesla has publicly noted that it is exploring the possibility of adding production capacity (both vehicle manufacturing and battery cell/module production) in China — and we believe the likelihood of an announcement in the near term has increased as the company recently registered a new wholly-owned subsidiary in Shanghai. As we have detailed previously, we believe this would likely require $4bn to $5bn of investment from Tesla — with the company funding vehicle manufacturing at approx. $2.5bn (i.e., 500k units of capacity annually at historical precedents of $5k per unit of capacity) and also fund half the investment of a new gigafactory (similar to its existing agreement with its partner Panasonic, where Tesla communicated investing approx. half the total $4bn to $5bn investment).
Looking ahead, Goldman next lays out the potential avenues to raise capital, listing:
Last, but certainly not least, equity:
The company historically has been active each of the past few years with equity raises to fund incremental growth (approx. $3bn in equity raised across three issuances in March 2017, May 2016, and August 2015). Based on our model we believe the company likely will use this avenue again given the total amount of cash needed and potential leverage ratios. In conjunction with our credit team, we believe the debt markets would fund incremental capital needs up to approx. 4.0x to 5.0x gross debt leverage on 2020 EBITDA, with net leverage of approx. 3.9x — similar to NFLX which has gross leverage of 5.0x and net leverage of 3.0x on LTM EBITDA, and given the current equity value coverage above the debt. We note this is a higher level than traditional auto peers (Ford and GM have gross debt leverage of 2.1x and 1.2x, which increases to 3.9x and 2.7x, respectively, when including Pension + OPEB obligations, but also nets down to 0.3x and 1.4x when the company’s sizeable cash balances are considered). With our 2020 EBITDA forecast of $3.7bn for TSLA, this implies over $5bn of total incremental debt capacity —leaving potential for approx. $2bn in equity capital raises
Putting it all together, Goldman has the following trade recos, the key of which is to go long the converts:
we see a compelling opportunity to express a view on the company’s liquidity levels through buying the TSLA 0.25% 2019 convertible bonds and selling a March 2019 call option to isolate the credit value; as detailed within, we believe selling a lower strike $330 call against the convertible creates a 9.2% annualized yield if the stock ends the period below $330 (+15% from current) at maturity while only losing a maximum of 2.0% (annualized) if the stock reaches $359.87/share at maturity.
Or simpler, just short the stock:
Sell Equity: We continue to see downside to TSLA shares as we believe the company will continue to be challenged in its manufacturing process — likely missing its target to sustainably produce 5k/week Model 3’s this year. Further, we believe automotive gross margins will be under pressure — resulting from the incremental labor required in the Model 3 production and for the Model S/X where we expect US demand to subside with the phase-out of the US Federal Tax credit for Tesla vehicles in combination with incremental competition launching in the next 18 months. Altogether, we see 32% downside to our $195 6-month price target.
And now, cue Elon Musk’s outraged twitter account, slamming the vampire squid for suggesting the company is $10BN underwater.
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“Protect and Serve Act” passes House. File under bipartisan-is-just-another-word-for-both-sides-licking-the-same-boot: majorities of both Democrats and Republicans in the U.S. House of Representatives have voted in favor of new hate crime legislation that sets up cops as a protected class.
Overall, just 35 House members voted against the bill (H.R. 5698), which isn’t far from making it a federal crime to resist arrest. Under the so-called “Protect and Serve Act,” anyone who injures or attempts to injure a police officer will be guilty of a federal offense—no matter how small the injury and no matter if it was intentional—if the offense has some connection to or effect on interstate commerce.
The House Liberty Caucus opposed the creation of this new federal hate crime, which it said “violates the Constitution”—the 10th Amendment grants authority to prosecute offenses against state and local cops only to the states—”and furthers the dangerous federalization of criminal law.”
The House just voted overwhelmingly to pass new federal hate crime legislation. Members of the @libertycaucus joined me to oppose this bill in accordance with the Constitution. https://t.co/gXz0rgo2mE #5thAmendment #10thAmendment #equalprotection #federalism https://t.co/fjyEAHFXEv
— Justin Amash (@justinamash) May 16, 2018
An increasing amount of conduct once only punished at the local level is now falling under the purview of the FBI, the Department of Homeland Security’s HSI unit, and immigration agents. (If the shift from community policing to more metrics-based and militaristic models has had bad effects on civilian-cop relations and incarceration rates, just think how much more damage FBI and ICE agents can rack up!)
Lawmakers are justifying the Protect and Serve Act using (what else?) the Commerce Clause. But this “does not significantly narrow the range of covered offenses or avoid the constitutional violation,” said the Liberty Caucus statement.
A tenuous connection to economic activity cannot transform a criminal law that has nothing to do with economic activity—and that is is explicitly for the purpose of public safety—into a regulation of interstate commerce. If it could, the Commerce Clause would destroy the Constitution’s design for a very limited federal role in criminal law enforcement, covering only a few crimes that are clearly federal in nature.
That ship has long since sailed, alas. But good on the (lonely!) Liberty Caucus for at least trying to stand up against Congress’ use of the Commerce Clause like an incantation that overcomes the Constitution.
A related bill in the Senate is currently with the Judiciary Committee.
FOSTA “unambiguously evil,” says law professor; bad effects continue to accumulate. When a bill banning prostitution ads passed the Senate, “a four-hour procession of lawmakers ascended the rostrum to congratulate each other on a rare act of bipartisanship,” writes Susan Du at City Pages. “The bill in question was never really up for debate. It was sold as way to rein back a modern surge in the sexual enslavement of women and girls, making use of the internet to enable prostitution punishable by up to 10 years in prison.” But if the bill, known as FOSTA, was “supposed to protect sex workers, no one bothered to consult them,” writs Du. “The threat to their well-being was immediate.”
Trump signed FOSTA in April, but we started seeing its effects almost as soon as the bill passed. By now, we’ve seen the demise of a slew of sites where sex workers advertise, exchange safety tips, and otherwise communicate. It’s also forcing everything from sex-education sites to popular social media platforms to ban discussions of prostitution and even all talk of sex-worker rights and safety.
Scott Cunningham, a Baylor University law professor who has studied the effect of the digital sphere on prostitution, called FOSTA “unambiguously evil.” From City Pages:
His 2017 study on Craigslist’s personals section is the only empirical analysis of online sex ads’ effect on violence against women. Its conclusion: The internet reduced female homicides by 17.4 percent.
“If you care about violence against women—and you should—you absolutely need to care about how FOSTA is unambiguously harming these women,” Cunningham says. “And if you believe that most of this market is just trafficked women, or if you define trafficking through the sleight of hand that basically says, philosophically, all prostitution is sex trafficking, you need to talk to some sex workers and ask them if they’re trafficked.”
Massie makes a stand for milk.
If it’s legal to sell raw milk in two different states, why would the federal government put you in prison for taking milk between those two states?! I have an amendment to the farm bill to fix this injustice…#pasteurizationwithoutrepresentation https://t.co/BYeKCoyuSC
— Thomas Massie (@RepThomasMassie) May 15, 2018
Darkest fucking timeline pic.twitter.com/VhPv7rl9Wo
— Gabriella Paiella (@GMPaiella) May 17, 2018
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