My full notes and analysis on the Wall Street Journal from the past week: April 10-16, 2017 (Week 15).  Please Enjoy.

The Wealth Transfer Mechanism

Companies who buy things they do not need, will soon have to sell things that they do.  Toshiba is learning this lesson the hard way.

“Toshiba is looking to cash out (its prized computer-chip business) assets to stay alive.” (link)

“Last month, nuclear-reactor maker Westinghouse Electric Co., which is majority-owned by Toshiba, filed for bankruptcy in the U.S., and Toshiba said it expected to book a 1 trillion Yen loss…to account for losses at Westinghouse.”

Investment Lesson:

The stock market works like a wealth transfer mechanism which funnels money from the impatient to the patient.

As a patient investor, Warren Buffett has been on the winning side of this equation for his entire career.  He has capitalized on companies selling things they need in order to pay for things they didn’t.  An excellent example includes his purchase of a pipeline from Dynergy in 2002.

In November 2001, Dynergy had bought a pipeline from Enron for $1.5 billion.  But not too long after, its credit ratings collapsed and it desperately needed to lower its debt levels.  So in July 2002, just 8 months later, it sold its pipeline to to Berkshire Hathaway for $928 million.  And there you have the wealth transfer mechanism at work. (link)

Gaming Capitalism: How Communists Exploit Free Markets

I don’t think we’ve come to grips with just how easy it is for a communist government to game a capitalist system.  Let’s take the following quotes for example:

“A recovery in producer prices in China and a broad rally in commodities have helped stoke Chinese stocks in Hong Kong,” (link)

“The economic data is not bad, and commodity prices have increased compared to last year.”

I tend to view this news with great skepticism.  Reason being, there’s just too much incentive for communist governments to manipulate commodity prices through artificial demand.  The positive ripple effect of artificial demand through a free-market system is profound.  Just a little bit can go a long way as I describe below.

• Commodity Prices: Higher prices for steel and other basic commodities create a sense of price stability and fuels investor confidence.
• Stock Market: Artificial demand creates artificially high profits. These unsustainable profits are then naively extrapolated and equitized by the stock market, thereby creating a multiplier effect on the value of artificial demand.
  • For example: If artificial government demand creates $100 million in profits for Company XYZ, and the market naively extrapolates these profits out indefinitely, a 10% discount rate will create $1 billion in market value. In essence, a communist government can turn the stock market into a printing press.  As in this example, 1 unit of artificial profits go in, and 10 units of market value comes out.

• Corporate Debt Market: Stable markets and higher profit margins allow companies to borrow and refinance debt at attractive interest rates.  This is especially important for highly indebted commodities-based companies.  Lower interest rates and fresh capital make companies seem more stable than they are.
• Banks : Banks receive three major benefits from artificial demand, as they:
  • Remain Solvent: Banks remain solvent as a result of improved financial outlook of debtors.
  • Appear to be better capitalized than they really are: Any equity on the banks’ balance sheets that came from a debt to equity swap suddenly looks more valuable, thereby making the banks seem better capitalized than they really are.
  • Can make more loans on a larger equity base.

An entire eco-system is then built on top of the foundations of artificial demand.  The longer this heavy handed market manipulation persists, the more real investors perceive it to be, and the bigger the bubble becomes.

As Gordon Gekko said, “The illusion has become real, and the more real it becomes, the more desperate they want it.”

Standard Causes of Human Misjudgment

There were many great examples of human misjudgment in last week’s WSJ:

Wells Fargo: (link)

• Incentive Caused Bias: “At one point, she is described as being ‘scared to death’ of hurting her unit’s sales figures.”
• Over-Influence by Authority: “The report also highlighted how the bank’s push to boost revenue and profit trickled down to thousands of employees who felt pressured to meet unrealistic sales goals. One Wells Fargo branch manager, for example, had a teenage daughter with 24 accounts, and adult daughter with 18, a husband with 21, a brother with 14 and a father with four.”
• Liking Bias & Shared Identity: “The board’s effort to understand the scope of the issues were hampered by the ‘insular and defensive’ way in which Ms. Tolstedt ran her division, as well as Mr. Stumpf’s loyalty to her,” Stumpf declined to remove Ms. Tolstedt, calling her, “The best banker in America,”

United Airlines: (link)

• Deprival Super-reaction Syndrome: “It is unusual, however, for an airlines to remove passengers who have already boarded the plane.”

Commins & Columbus, Indiana: (link)

• Reciprocity: “Amid halting negotiations back in Columbus for the city to land its first Japanese autoparts maker, one of the Japanese executives had an emergency eye problem. So Cummins Inc., the biggest company in town and the key player in its push for internationalization, lent the Japanese executive use of its corporate jet for a trip to the Mayo Clinic.  The deal was closed shortly thereafter.”

Lotte: (link)

Disliking Bias & Pavlovian Association: “To top it off, Lotte this year became the target of raucous protests by Chinese nationalists, who uploaded videos of themselves ripping up Lotte products in stores…The Chinese protests,…came after the company made a deal that allows the U.S. military to put a missile-defense battery on a Lotte golf course in southern South Korea.”

“Greater than 0%”

The other week an analyst suggested that Apple could acquire Disney if there’s a cash repatriation holiday.  When asked for the probably of such a deal, the analyst responded that it’s “greater than 0%” (link)

“Greater than 0%” means practically nothing.  For example, I’d bet there’s a greater than 0% chance that we’re in the Matrix.  So the chance that we’re living in a vivid computer simulation and that Apple could acquire Disney both have probabilities greater than 0%…

Causes of Thyroid Cancer

It’s been found that higher rates of Thyroid Cancer are caused by:

• Obesity
• NOT Smoking Cigarettes
• Certain fire-retardant chemicals

Mind-blowing article of the week: 5 Things to Know About Crispr (link)

This is a mind-blowing article about genetic modification.  It revolves around Crispr, a bacteria is found in the our immune system’s bacteria and acts like “the Borg” from Star Trek to fend off future diseases.  Scientists want to hack Crispr and use it to cure genetic diseases.  Ultimately, they could use Crispr to hack egg, sperm or embryos to pass on genetic alterations, thereby permanently altering future generations.

I can just imagine a future where genetic modifications replace vaccinations.  It also makes me uncomfortable thinking about the Gattaca-like implications and abuses of such technology.