Bernanke's Haiku

This is Ben's market;

You're short on "Valuation?"

What are you doing?

Garmin Borrows Jet With $173.7 Million Deposit

Yep. Seriously.

We already know that Garmin is anti-Beagle so this development shouldn't be much of a surprise. 

They're giving a $173.7 million dollar, INTEREST-FREE LOAN, to a customer (representing 14.1% of their free cash balance). If they're not requiring any interest payments for a nine figure loan, then what do they want in return? Why, to borrow a jet, of course!

You can't make this stuff up. 

Check out the filing here. Emphasis added:

"On March 14, 2013, Garmin International, Inc. (“Garmin International”), which is a subsidiary of Garmin Ltd., entered into a Memorandum of Agreement (the “Agreement”) with Bombardier, Inc. (“Bombardier”).

Garmin International is the supplier of the avionics system for the Lear 70 and Lear 75 aircraft currently in development for Learjet, Inc., which is a subsidiary of Bombardier (the “Program”). In order to assist Bombardier in connection with delayed cash flows from the Program partially related to the certification of avionics for the Program exceeding the planned delivery date, Garmin International agreed to provide Bombardier a short term, interest free, loan of $173.7 million in cash in seven installments beginning on March 22, 2013 and ending on September 20, 2013 pursuant to the terms and conditions of the Agreement.

Conditional upon Garmin International returning to Learjet a flight test vehicle and delivering specified Garmin software and hardware to Learjet no later than July 11, 2013, Bombardier will repay the loan in five installments beginning on November 1, 2013 and ending on March 7, 2014, provided that the repayment dates will be extended on a day for day basis if the July 11, 2013 milestone date is extended."

One could also interpret this language as stating that in order for Garmin to get their money back they have to not only return the "test vehicle" to Bombardier, but they have to install hardware and software on it. 

One might also calculate, if one had a calculator and spare time, that Garmin could increase their 2013 pre-tax income by at least 4 cents per share if they charged a fair rate for a high-yield borrower (at least 5% APR) on their gift to Bombardier. 

Free financing and some cool gizmos attached to your jet, also free of charge? Sounds like a good deal to me. 

Still short GRMN.

Save Man's Best Friend: Short Garmin

I'm sure we all know this famous proverb:

The enemy of my Beagle is my enemy and must be eradicated!

Something tells me this device isn't PETA approved. (garmin.com)

Garmin is a stock that possesses the rare triple confluence for a short position: A declining brand, declining fundamentals and a very shortable chart.

***Full Disclosure: long Beagles

You will not find a non-telecom technology company that yields as much (5.05%!) with such a generous payout ratio (>60%). While their shareholder friendly approach of paying out a majority of their earnings has been attractive for many years, Garmin may have seriously hampered its growth potential going forward. Their still-solid balance sheet is a headwind for a short position but eventually GRMN could be reduced to becoming a strictly commercial/aviation/marine navigation play. They are facing threats from all over - Nike, Google, Apple, Under Armour, Fitbit, Jawbone - which makes one consider how long their PND division (which is their largest, also showing the worst sales decline of all divisions in 2012) will last.

I think it will be tough for Garmin to continue to pay out $0.45 per share every quarter - some negative news like a dividend cut would pour gasoline on this sweet looking chart:

Major support was breached after their fourth quarter earnings call and I'd expect that rising trendline to provide further resistance should GRMN try to stage a rally.

As long as the stock doesn't rally too much before Thursday, I'll be initiating a short position after the stock goes ex-dividend on the 13th.

An Interesting Coke Analog

Should this replicated pattern play out, Coca-Cola could see the mid 40s this year:

Click Me - I will become much larger. 

Elon Musk Needs To Shut The F*** Up

Tesla Motors needs its CEO to take a time-out ride on one of his Space X rockets for a few weeks.

Seriously.

Elon is on an egomaniacal, defensive rampage in an attempt to quell any bad press the Model S is receiving. It's pointless. He's just making himself, and in turn, the company and its shareholders, pay the price.

He is incentivizing every automobile "reviewer" with a blog and an axe to grind to create a headline for the page hits or video views that he commands wherever he goes on this sloppy tour of stuttering and poorly executed defense of his delicate sensibility.

Tesla has created a revolutionary product which, if left alone, will prove to be a breakthrough just like the iPhone in 2007. Or the Model T. Just like (insert any disruptive advance in technology, transportation, communication, or healthcare, etc.) the Model S has its detractors. It attracts the haters like almost no other company (but that's how you know they're doing it right so far). Most don't even know how to put together a logical short thesis. They just know they don't like change and they think Tesla is somehow the love child of Barack Obama and a reckless Congress. Whatever.

The one certainty here is that every time Elon opens up his mouth, fires up his Twitter machine, pens a blog or is a guest on a financial news program, money flows from his (and his shareholders') brokerage accounts in a swift manner. The market knows that Tesla is in a delicate state while trying to convince the world that a viable electric car is here to stay.

Elon did not need to post a tweet, potentially bringing forth an SEC investigation for improperly disclosing material information, about being cash flow positive for one week in December.

He did not need to hastily hop on CNBC's closing bell to defend against Broder's (albeit pathetic) NYT takedown piece.

He did not need to post a subsequent series of blog posts which at best brought forth more questions than definitive proof that Broder lied.

He did not need to be a Bloomberg guest this morning to disclose that "hundreds" of orders were lost and it cost up to "$100 million" in market capitalization reduction (of which $25mm was Musk's).

In every instance of a minor problem, Tesla could easily release a simple press release. Press releases do not bring forth a feedback loop of negative publicity and a desire to bait a CEO into a ridiculous marathon of poorly executed responses. They've already won the awards that matter.

It's not difficult to issue a release which states, "The most advanced automobile in the world should be expected to have minor bugs in its first generation. We can assure you the entire Tesla Motors organization in Fremont, CA is working hard to perfect each and every nuance of the Model S. We are issuing OTA updates regularly (something no other automaker does) and are consistently improving our defect rates. We thank you for your patience and understanding, a revolution does not happen overnight." How hard is that?

Be above all of it, Elon. The Model S can do all the talking. It can even prop up the battered stock you have created.



Disclosure: I'm still long TSLA.

Google Wireless

Google has done a relatively poor job monetizing the massive, surprise takeover of the smartphone world made possible by Android. I think this is about to change; possibly in a dramatic fashion.

We all know the threat heard 'round the world made by Steve Jobs. That whole "I'm gonna go thermonuclear on Google's ass if it takes every last penny" thing which constantly gets thrown around. If Steve did indeed start that war, the general he left in charge hasn't fired a shot.

Sorry, Tim. It's true.

The only shot fired thus far was indeed fired from Mountain View. Not Cupertino. It was Google's purchase of Motorola. And guess what? It wasn't all about the patents and I don't think they're done.

I've wrote about this before. The route they are taking existed previously as a call option after taking ownership of Motorola. Now, the possibility of a truly Google-designed smartphone looks as if it is on the near horizon. It's the next bomb to drop, and it was inevitable. They couldn't go on forever switching between the HTCs and LGs of the world to design their Nexus devices hoping one will truly take on the iPhone or an increasingly defiant Samsung. This "X" project was inevitable.

Maybe they'll be able to finally wrangle some of that elusive smartphone profit from Apple and Samsung, but I don't think they're done there. There's another oligopoly to exploit. Another bomb on the horizon.

I believe there is now an elevated chance that they announce a bid to buy Sprint.

Sprint's pending deal with Softbank provides a minor speedbump but I seriously doubt that the Japanese firm's backers will be willing to reach deeper in their pockets to start a bidding war, as the deal in place is already fueled by debt. A $750mm breakup fee on Sprint's end is nothing unreasonable either.

We already know Google is experimenting, or some might say threatening The Big Ol' Phone Companies, with plans to control its own network infrastructure in Kansas City with Google Fiber (neighboring with Sprint, whose headquarters are in Overland Park). We know that Google has a very good relationship with Sprint already. They were early backers of Clearwire (soon to be owned fully by Sprint), have embraced Google initiatives like Wallet when Verizon wouldn't, and allow seamless Google Voice integration. Sprint offers a simple, unlimited pricing structure and is captained by a very able Dan Hesse.

Most importantly, this news crossed the wire tonight. Google is testing "highly competitive consumer electronics" on a secretive network on their campus, using the same wireless frequencies that Clearwire operates on. If that's not a significant piece of information, I don't know what is.

If they announce a bid, Google Voice will truly mean something different. Think about the implications. There are many.

The Google wireless offering would be truly vertically integrated as they would provide hardware, software and the wireless network. Google's official Mission Statement? "To organize the world's information and make it universally accessible and useful." An integrated wireless experience would ensure that third parties (wireless and cable operators, smartphone OEMs, software developers) would not be able to interfere with that goal. It would also capture a lot of that "profit" stuff. You know, maybe a piece of that Verizon money.

Why now? Well, the clock is ticking. The Sprint/Softbank wedding is due to close in "mid-2013"so the countdown has started.

An $8 Sprint bid would cost Google roughly $24 billion. A $10 bid, $30B. Think that's too much? Well, they have roughly $48 billion in cash and short-term investments right now.  They have GOOG's own stock/currency (which is about to be split, leaving Larry Page, Sergey Brin, and Eric Schmidt with more latitude for a bold move like this) that is near all-time highs and essentially no long-term debt. I'd say there's room for another purchase.

What about a rumored partnership with Dish? I don't think it's likely. First, it would take years to build a network together. Second, and more importantly, CEO Larry Page is all about taking "moonshots." He wants to see progress not just in small increments, like a partnership with Dish would bring, but change with large orders of magnitude. Think of the playground he would be creating if such a deal were to happen. Think of the shock and impending threats to the lumbering, restrictive, and expensive giants that AT&T and Verizon have become.

As someone talking their book (on both sides of this possible transaction), a Sprint bid would certainly send me to the...well, you get it. I own both Sprint and Google in my long-term accounts, and have for years, but I will be adding Sprint calls tomorrow.

Don't Expect a Tesla Q4 Deliveries Miss

Tesla Motors' detractors -- and there are many -- harp on their postulations that since the company has disappointed with production numbers before, the company will necessarily continue to do it again.  The party line is essentially that it's really hard to start a car company and Tesla got a sweet government loan so they're destined to fail. I think that's a really bad short thesis.  Combine that with a few puzzle pieces that we can put together here and I think it becomes pretty obvious that a production miss is probably not in order.

The most common claim is that Tesla won't scale their production fast enough and they will miss their production targets. Their 4th quarter target for Model S deliveries, stated in the Q3 shareholder letter, is at 2500-3000 cars.

We know the following:

• At the end of the third quarter, the Model S production rate was at 100 cars per week.

• On November 5th, on the release of third quarter earnings, the company was producing at a clip of "over 200 cars per week." (That means they doubled production in about 35 days)

• The company expected to be at 400 per week "one month from now," with "now" being November 5th. This could be interpreted as Tesla producing well over 400 cars per week by the end of Q4, possibly even 500 with simple (conservative) linear extrapolation. 

There is also a difference between cars produced and cars delivered. From the third quarter release we learned that Tesla produced 350 Model S and delivered 250. Should we then just copy that same ratio, around 71%, apply it to a Q4 production goal and call that total Model S deliveries? Absolutely NOT.

Let's think about what it actually means when we talk about production versus delivery. Tesla only produces a car if an owner completes her order and specifies her preferences, it's then delivered soon thereafter. They have no inventory sitting around hoping to be sold. It's all made to order.

As we saw above, Tesla was producing at a rate of 100 cars per week in the last week of the third quarter. That same number, 100, was the exact gap between cars produced and delivered in that quarter. A more reasonable technique to predict the difference between production and delivery should be to just subtract one week's worth of production to simply allow for delivery time and that explains the production/delivery gap. Makes sense.

Depicted differently:

These estimates are very conservative, but they show Tesla comfortably landing within its delivery target of 2500-3000 Model S. What happens if Tesla hit 400 cars per week in early December, as it could have been interpreted in the shareholder letter prediction?

Let's call it production of 400, 430, 460, and 490 for the four full weeks of december. I'll save you the time and space it takes to show that mathematical proof, but it would signal a possible extra 240 Model S deliveries. That's not even including the accelerated numbers that November would have likely seen. And possibly enough to put Q4 deliveries at a level that beats estimates. 

Proving further progress, we saw an ill-fated Tweet from CEO Elon Musk in early December which proclaimed that Tesla was narrowly cash flow positive during that week. There's our indicator that production growth continued throughout November. At this point the entire Tesla factory would have needed to be virtually shut down for December in order to miss Q4 estimates. 

That didn't happen. 

I believe TSLA should be held in a long term account with expectations of extremely high volatility and drama, and that little attention should be paid to short term results or petty claims by short sellers. That said, I believe that in all likelihood Q4 Model S deliveries is not a metric a long term shareholder should be worried about come earnings season. 

Don'ts

Dos and don'ts are nice

But why make it so complex?

Fifty percent less

Don't trade in the first half hour of the day

Don't trade in the last half hour of the day

Don't trade pre-market

Don't trade after-hours

Don't trade on an idea formulated during that trading day

Don't trade inverse or leveraged ETFs

Don't trade any product related to the VIX

Don't trade on Fed Day

Don't trade on any recommendations you heard/read from an economist or analyst

Don't trade when you have more than .75% of your capital at risk in the trade if you're wrong

Don't trade if you don't know key technical support and resistance

Don't trade anticipating a large directional move after an earnings report

Don't trade if you don't know when a company is reporting earnings next

Don't trade if you're tired

Don't trade if you're busy

Don't trade if you're at work

Don't trade on a mobile device

Don't trade if you just want to make a trade

Don't trade if you just have a "hunch" on the direction of the market or an individual security

Don't trade if it swings your account too long or too short

Don't trade a market "darling" stock (AAPL)

Don't trade stocks that are "hot" in message boards, social networks, or popular with "gurus"

Don't trade while watching or having had previous, unprotected exposure to CNBC

Don't trade if you're trying to make up for a recent loss, whether it be in that stock or another trade

Don't trade if you feel like you're on a roll

Don't trade if you don't have a long-term portfolio

Don't trade if you think you're too "disciplined" to use stops

Don't trade if you're hoping to win a coin toss

Don't trade if your ratio of reward to risk is less than two

Don't trade if you expect your trades to be profitable more than 50% of the time

Don't trade if you haven't committed this list to memory

Don't trade if you violate any of these rules

Nitpicking Howard Marks

Howard Marks is likely one of the greatest investors of our time, a true wizard, and has deserved a ton of respect from the investing world. I've been reading his book, The Most Important Thing, for the last week or so.

I respect his accolades and the tremendous success he's had at Oaktree.

But as an investor reading a book on investing, naturally I have my "investor" cap on. And when you have your investor cap on, you're looking for something this isn't quite right, something that stands out and allows you to raise a red flag. Because, you know, there's money on the line! I found that something early, on page 25, and I haven't been able to take the book seriously since. In fact, I've moved on to my next book after a hundred pages.

When referring to the crash of the "Nifty Fifty" stocks in the 70s, Marks explains (emphasis mine):

"Within a few years, those price/earnings ratios of 80 or 90 had fallen to 8 or 9, meaning investors in America's best companies had lost 90 percent of their money. People may have bought into great companies, but they paid the wrong price."

Um, you sure about that, Howard?

Marks instructs us that since the P/E ratios of these companies went down, so necessarily did investors' wealth. That is so wrong and can't be chalked up to some kind of editorial oversight. He's simply got it wrong. A rising P/E ratio is not the only way investors profit just as a falling P/E doesn't guarantee a loss. That may just be the only way value investors choose to profit.

Let's take a look at everyone's favorite darling stock, Apple.

From 2004 to present:

Here's Apple's P/E ratio, charted from the same time period:

Apple rallied from around $12 to $700, a return of 5833%, all while its P/E ratio lost 77% with a decline from 60 down to 12. Stocks can appreciate, sometimes massively, with falling P/E ratios.

Besides spending dozens of pages quoting himself, which is always (not) charming and (not) modest, Marks never truly convinced me that his mantra is "buy cheap relative to instrinsic" instead of "buy cheap no matter what."

Wisdom From Soros

It's worth the time to read the whole thing, but this passage from George Soros on feedback loops, bubbles and the efficient market is particularly useful when thinking about the "Fiscal Cliff" and QEInfinity:

In my theory of reflexivity I assert that the thinking of economic agents serves two functions. On the one hand, they try to understand reality; that is the cognitive function. On the other, they try to make an impact on the situation. That is the participating, or manipulative, function.

The two functions connect reality and the participants’ perception of reality in opposite directions. As long as the two functions work independently of each other they produce determinate results. When they operate simultaneously they interfere with each other. That is the case not only in the financial markets but also in many other social situations.

I call the interference reflexivity. Reflexivity introduces an element of unquantifiable uncertainty into both the participants’ understanding and the actual course of events.

This two-way connection works as a feedback loop. The feedback is either positive or negative. Positive feedback reinforces both the prevailing trend and the prevailing bias — and leads to a mispricing of financial assets. Negative feedback corrects the bias. At one extreme lies equilibrium, at the other are the financial “bubbles.” These occur when the mispricing goes too far and becomes unsustainable — boom is then followed by bust.

In the real world, positive and negative feedback are intermingled and the two extremes are rarely, if ever, reached. Thus the equilibrium postulated by the efficient market hypothesis turns out to be an extreme — with little relevance to reality.

Members of congress wield a very powerful manipulative function. Whether they move forward with what they know they should do, or what their parties would like to push as their perception of reality, will determine whether we get positive (the can continues to be kicked) or negative feedback (reversal of unsustainable trends).