Monday, October 5, 2015

Pershing Square modifies their performance numbers with an eight day week

Pershing Square (the hedge fund associated with Bill Ackman) has a European listed closed-end fund called Pershing Square Holdings.

Pershing Square Holdings has a website on which it discloses weekly and monthly net asset value and performance.  This performance matches the returns of Bill Ackman's hedge fund.

They also disclose funds under management at Pershing Square (that is all assets under the strategy).

This is the website:

Pershing Square Holdings reports both weekly numbers and monthly numbers.

According to prior press releases the numbers were released in the following pattern.

(a) Weekly numbers were reported as per the close of business Tuesday and made public the following Thursday (except when there are holidays).

(b). Monthly numbers are reported for the close of the month two days after the close of the month.

On Friday 2 October I took a screenshot the results. Here is that screenshot.

The observant will notice that the reporting dates are 

1 September,
8 September
15 September
22 September and 
30 September.

The last reporting date should - if the pattern were continued - be 29 September. Instead they reported data for 30 September. 

That last week has eight days.

The results as reported on the 30th of September were bad. Pershing Square scored minus 12.5 percent for the month.

However they were
 worse as per 29 September than 30 September. Valeant rose 12-13 percent that day. Valeant is Pershing Square's biggest holding. The vast bulk of the book moved in Pershing Square’s favour during the last day of the month.

The rough calculation is that Pershing Square's performance was almost $800 million worse on September 29 than September 30 - which a cynic might say provides an incentive not to report September 29 results. Of course I would say that Pershing Square is being (extremely) modest about their fantastic day on the 30th of September. 

A portfolio calculation is Appendix A.  [Our estimate is a $777 million swing between the 29th and the 30th of September. The only position that is not disclosed is the size of the Herbalife short. We have a fairly accurate estimate of the size of this position but it does not matter much for this calculation.]

Pershing Square was - it seems - would normally have report a minus 16.6 percent number as a month to date number, but possibly in innocent error did not make this (rather shocking) disclosure. 

There are plenty of stories in the press about Pershing Squares bad month (see hereherehere). I know that Pershing Square is a remarkably open institution. Mr Ackman is the king of the three hour press conference. It is unthinkable that he would not tell the world just how good their day was on the 30th of September.

So I will. 

Pershing Square - my estimate - was down 16.6 percent month to date as per the 29th of September but had a miraculous day on the 30th of September and finished down a mere 12.5 percent. 

The press reported about Pershing Square's terrible month but could have equally reported about their fantastic day. Without reporting the fantastic day I suspect the press is treating the Baby Buffett unfairly.

The new footnote

There was a footnote that explains the reporting data on Pershing Square Holding's website. Here it is in text and photo...

Weekly net asset value (“NAV”) is calculated as of the close of business on each Tuesday and posted on the following Thursday. In the event that Tuesday is not a business day, the Company will calculate the close-of-business NAV as of the business day immediately preceding that Tuesday. In the event that Wednesday or Thursday is not a business day, any such weekly NAV will be posted the next business day following that Thursday. End-of-month NAV is calculated as of the close of business on the last day of the month and will be posted within two business days thereafter. In the event that month-end falls on a Wednesday, the Company will report the month-end NAV on Thursday, and not report the weeklyTuesday NAV. In the event that Wednesday or Thursday is not a business day, any such month-end NAV will be posted the next business day following that Thursday...

In summary it says in the footnote says if the month ends on a Wednesday we will not bother reporting the Tuesday numbers. 

And the photo:

If you are really observant you will note the typo in the footnote. It says weeklyTuesday without a space in the text. This was deeply suggestive that the footnote is recent because Pershing Square's presentation material is usually highly polished and without typos. 

This footnote, with its sloppy and atypical typo was almost certainly written by a junior. [As you will see the footnote has been modified within days of its appearance.]

I wanted to confirm the footnote was recent. Did they just do it to hide the fantastic day they had on the 30th of September (or a cynic might say their bad month until 29 September) or did they have it all the time?

The way to tell is to check old months.

The last time that a month ended on a Wednesday is December 2014. 

If the rule applied then we should see a data point for December 31 and no data point for December 30.

Confirming recency Pershing Square Holdings had both a December 30 and a December 31 data point. They were still on the website. Here is a picture. 

This it appears this month is the first time Pershing Square have applied the month-end-on Wednesday rule. 

A cynic might say that this is a ham-fisted attempt to hide an extremely bad month-to-date data point. However I just think someone wanted to hide the spectacularly good performance on 30 September.

But don't worry - we will report Pershing Square missing data point for you.

On our estimate Pershing Square month to date on 29 September 2019 was down 16.6%. For the month to date. And then in brilliance they had a great day and finished the month much better.

They had to muck around with the calendar not to report to you the wonderful day they had on the 30th of September. [A cynic might suggest they mucked around with the calendar to hide bad results - but Mr Ackman would not do that.]

More changing footnotes

I sent this material to the Financial Times. I copied it to Bill Ackman. I think it was also handed around fairly widely. Within a few hours of market open Pershing Square had released a press release about their new market disclosure rules.  You can find a PDF version of that press release here

The new rule was as follows:

Pershing Square Holdings, Ltd. has made two changes to its NAV reporting policies. Weekly and monthly NAV reporting will now be provided on a one-business-day lag rather than a two-business-day lag. For weeks that include a month-end NAV report, PSH will provide only month-end performance. As a result of the changes, investors will now receive more timely NAV reporting, but only one NAV report each week.
Now the company will not report weekly results for weeks in during which the month ends.

The short-lived "if the month ends on a Wednesday" rule has gone and has been replaced by another footnote - the picture of which is here... The NAV page has also been reformatted.

The month end on a Wednesday rule was absurd. If there was no reason to give the data point for a Tuesday when the month ended on a Wednesday you could argue there was no reason for a Tuesday data point when the month ended on the Monday.

That suggests yet again they changed it on the spot so that they did not have to report the fantastic data on the 30th of September. [A cynic might suggest that they did it so they did not have to report an atrocious month-to-date data point on the 29th - however Bill Ackman would never risk being so needlessly deceptive.]

Whatever: the [Pershing Square] will not report a weekly number if the month ends on a Wednesday rule is now gone. They will no longer report weekly data in any week that a month ends.

This rule also has problems which indicate it was thought up on the fly. What for instance happens when the month end occurs on a Friday? Do they not provide any results that week (preferring instead to wait to the following Tuesday)?

Pershing Square changed its rules on the fly inventing and thinly disclosing an 8 day week to hide their wonderful performance on the 30th of September. The new rules are a confused and made up to support their modesty.

So we will report again. As of 29 September 2015, a date that Pershing would normally have reported, the funds were down 16.6 month to date. And they had a great day on the 30th.

Eight days a week

For the moment though Pershing Square thinks it is okay to - without prior notice - report on an eight day week. Sure they did it so they could modestly hide the fantastic performance on 30 September. But the motivation is not the issue here.

Having an eight day week opens Bill Ackman up for allegations of deception - allegations that Bill should neutralise immediately by reporting the interim data point as originally planned.

I would expect nothing less.


And just because eight day weeks are fun I should finish with a song for Bill Ackman.

As per the Beatles: "I ain't got nothing but love babe, eight days a week".



Here are the holdings and prices as we estimate them at Pershing Square. The holdings other than Mondalez and Herbalife are from the last quarterly form.

The Mondalez holding is from recent filings.

The Herbalife estimate (which does not matter much for this calculation) is from our own estimate. It does not matter for this calculation as the Herbalife price was almost entirely unchanged on 30 September.

It is clear that Pershing Square had truly miraculous performance on 30 September. A cynic would say the month-to-date that they did not disclose (the month to 29 September) was terrible. I prefer to think of 30 September as wonderful.


CompanyTickerHoldingPrice 29 SeptemberPrice 30 SeptemberGain on 30 sep
Valeant PharmaceuticalsVRX19473933$158.08$178.38$395,320,839.90
Air ProductsAPD20549076$125.82$127.58$36,166,373.76
Canadian PacificCP13940890$138.14$143.57$75,699,032.70
Restaurant BrandsQSR38003984$34.71$35.92$45,984,820.64
Platform Specialty ProductsPAH42737394$12.06$12.65$25,215,062.46
Howard Hughes CorpHHC3568017$112.52$114.74$7,920,997.74


Hat tip to The Skeptic - and there was discussion with him via email. The core 8 day observation was his. The footnotes and their changes over time was my observation. 

Sunday, October 4, 2015

This is for anyone who enjoys hiding in wardrobes

Some weekend diversion... Pulp headlining Redding.

It helps if you already love the Different Class album.

Friday, October 2, 2015

Sun Edison - some comments and a way forward

Bronte has taken a long position in Sun Edison. We did this after the first and indeed second stages of the collapse in that stock. The stock decline here is spectacular. First Solar and Solar City have had issues - but nothing like this.

Until about a week ago we were showing (small) profits on the position. Then it took yet another leg down. I know the cliche about trying to catch falling knives - but we think this is a quite good bet - and would be a better bet if the board took decisive action to fix immediate and pressing problems.


Sun Edison develops huge and highly capital intensive solar and wind project where the power is largely pre-sold and where separate financing is developed for each project. These projects are then sold to [“dropped down to”] semi-captive yield companies sold to mostly to yield sensitive investors.

There are several issues. Big solar projects are massively capital intensive – think of utility scale power generation where you have to pay for the next 25 years of fuel upfront. The projects have huge debt but also reliable high margin cash flow.

Secondly there is a pretty obvious conflict of interest in the “yield co” drop-downs. We have successfully shorted a few companies where we think that overpriced assets were being sold to captive vehicles. In the end they these were good shorts - if you can't treat the investors in the drop-down vehicle fairly you will eventually wind up with fewer investors, less access to capital and less underlying profitability.

Thirdly, because of the related parties and the copious amounts of different types of debt these companies have complex and even scary accounts. At Bronte we are quite good at getting to the bottom of complex accounts. But we have a problem with these.

In a meaningful fashion Sun Edison is a “trust me” story.

Whatever, the problems Sun Edison and its yield cos have been smashed. Once fairly obscure solar developers have become a major topic of discussion on Wall Street.

It took us a while to understand why they have fallen so hard. The argument comes down to complex accounts, lots of debt and a peculiar acquisition of door to door marketing company(Vivint).

But there is also more than the usual amount of rumour and innuendo. On Twitter there are arguments we know to be wrong and arguments that are simple fear-mongering (calling Sun Edison “Sun Enron” is one such appeal). Sure the company is highly levered and complex but it is almost certain that the past deals have been good deals. Any solar farm deal you put in place 3-5 years ago has worked out. Both solar panel prices and interest rates are lower than you would have baked into your cash flow models. We would be enormously surprised if the past deals of Sun Edison did not work out.

Whether the future deals work out is however an open question. Low solar panel prices and low interest rates are not exactly a secret – and the funding cost for solar panel farms has risen with this panic. Bluntly we think unless the company repairs its relationship with capital markets it is unlikely to be able to generate good deals in the future and it will wind up in run-off.

There is a deeper problem with the way these companies [yield cos and their parents] see themselves and communicate with investors. That comes down to the fact that many have their roots in semiconductors where operating leverage is everything. You disclose your costs, your variable versus fixed, capacity expansion and so forth because if you make solar modules, wafers or chips that stuff matters a very great deal to your business. Investors use and demand that information because simply put, it matters and drives the profitability of the business.

A yield-co is a completely different business – it is a non-bank financial company.

Non-bank financials “blow up” for one of three reasons, (i) credit risk, (ii) duration mismatches and (iii) and unstable funding. If you want to assess TerraForm Power (Sun Edison’s yield co) you need to assess whether the credit risk on the projects (the counter-party) is okay, how the contract and funding is (eg floating/fixed etc) and all the ways in which project development funding is able
to roll into long-dated funding.

A friend put this to a yieldco and the management balked at providing that level of project detail. My friend's response: “well, are you Northern Rock?”

And that is the guts of the issue and the market fear. We have gone to considerable effort to convince ourselves Sun Edison is not Northern Rock with solar panels. We have talked to several people who have organised funding for these things and it seems okay to us. Specifically all construction finance automatically can be termed out as project finance (over the life of the project and linked to the project) when the construction is done.

If this is true the market fear for this company cannot cause insolvency. Given that the company is priced as if insolvency is likely this stock should produce a good return from here.

Alas we could be wrong here. We can’t see all the funding (the disclosure is complex) but the bits we have seen have this character. We checked through several sources and we don't think the company can’t have a “run on the bank”. The Northern Rock outcome is unlikely.

Now of course we have not seen and understood all of the finance deals. Only the ones we can find. But that is sufficient to know we are probably right. And that is the case for buying. The old projects are good and they should run off at an attractive clip.

The Vivint Acquisition

That said this company does not behave like a financial institution, they have been rash and callous in their treatment of capital markets. This is dumb. Capital (not solar equipment) is the main input in this business. And capital is cheaper if people trust you.

Moreover management did a really foolhardy acquisition and explained it badly.

Vivint (the target) is a door to door marketing scheme selling solar systems. Some suggest multi-level marketing scheme characteristics but I cannot find the contractual terms that indicate it is an MLM. [Contra: friends have done research on the numbers of complaints at State agencies concerning Vivint.]

Moreover the product it is selling door-to-door (financed solar systems) is not a bad deal for customers. Customers put the solar panels on their roof and their power bills go down. Whether the solar system is owned by the household or some corporate structure what is effectively going on is a loan to the householder where the householder will repay the loan by splitting the utility bill saving with the solar company. Things can go wrong in this deal – but those things are not very likely.

That said, there are good reasons why roof top solar is less attractive than utility scale solar farms. The main one is that rooftop solar gets under-priced use of the grid. The grid is essential here – unwanted solar is sold to the grid and the grid provides electricity when the sun doesn’t shine. My business partner was once a utility CEO. He has an instinctive skepticism of rooftop solar. He thinks – correctly – that people with rooftop solar underpay for grid services.

In Northern California this is becoming explicit. Pacific Gas and Electric is proposing changes which explicitly charge households with solar panels more to access the grid. Whilst we have no view on the size of the charge the direction is probably right. This will become a trend and make roof top solar less attractive in the future.

The Vivint acquisition - which looks strange - was poorly explained and was bundled with a few details that indicated that the margins on projects dropped down to the captive yeild-cos are declining caused a run on the stock. Moreover there were lots of hedge funds who had oversized positions in Sun Edison before the collapse. There clearly was a rush to the exits.

And it capital market terms those can be self-fulfilling. The equity and debt cost for Sun Edison has risen substantially and this seriously impedes the economics of the company. Its that strange thing about financials that lower prices for equity and debt reduce the future cash flows.

The current situation and the way forward

Sun Edison has lost about 80 percent of its value without the slightest hint from the management team that there is a problem. The credit default swaps have moved against them and it will be far more difficult to grow whilst the situation is like this.

There really is one issue here. Can they find and develop new solar plants and drop them down into project financed bankruptcy remote vehicles and (a) make a profit and (b) ensure the new owners of those vehicles make enough return to keep them coming back for the next vehicle? [At the moment there is a fairly strong private market for solar projects - people like large pension plans - but the same concern applies to them too. They got to trust you.]

If they can't develop and sell either growth stops dead or the company becomes a ponzi.

Alas with market distrust it becomes unlikely that future projects can meet the required return hurdles. The private market for completed projects will also have the same concerns about the management.

The best case here is that the company has become a melting ice-cube. It is worth something (I think a fair bit more than the current price) but every drip of cash that comes off in the end goes either for debt repayment or is returned to shareholders.

The whole project development team - the raison d'ĂȘtre of the company - ceases to have any use. They should all be fired. Yes - all of them. [If you work for Sun Edison it is your job too. And that will eventually include the board. Them are the stakes. If the current board doesn't do something about this it is eventually your job.]

There is an alternative - an alternative I think the company should take. They should pay their contrition to the market - and give the market what the market wants.

What the market wants here is a clear vision of financial control and responsibility. They want to know that Sun Edison is not Sun Enron.

Stocks don't just fall 80 percent in a vacuum. Someone has to be held responsible - and the board needs to ensure that happens to ensure Sun Edison has a future.

That person is the CEO.

Ahmad R. Chatila

Ahmad R. Chatila (Sun Edison's CEO) is a visionary. Indeed Mr Chatila is the reason for Sun Edison's success to date. I have heard managers describe him in glowing terms - amongst the best CEOs in America.

And I don't disagree.

Except that he should be fired. Pronto. Now.

Sun Edison - through the vision and drive of Mr Chatila has become a financial institution. One with a lot of run-off value. One which I think has improved the world a great deal.

Vision, drive and competence are usually great things for a CEO.

Not in this case.

I am an old fashioned kind of guy. I do not think visionaries should run financial institutions.

Visionaries running financial institutions end in disaster.

Mr Chatila has built an institution for which he is profoundly unsuitable to run. The market has made that abundantly clear.

Pay him out

I have mostly been unsympathetic to firing executives and leaving them with a big payout. Mr Chatila is an exception.

Mr Chatila has not done much that is wrong. He has created - from very little - a worthwhile, valid and large business. He has achieved much.

He has not done very much that is wrong except create a business which he personally is a woefully inadequate CEO for. For this he should be rewarded: as recognition of (a) what he has truly created and (b) for going quietly and constructively.

Calculate his payout, add thirty percent and fire him.

Who to appoint?

There is a core criteria on picking the new CEO.

They need to be boring and from a control culture. The idea CEO would be someone from (say) the risk management department of Goldman Sachs. What you want is a dull suit occupied by someone whose job it is to pull wings off butterflies. Someone whose job it is to ensure - and be seen to ensure - that bad projects are not funded.

The market wants someone who will get on an earnings call and talk about asset liability matching, FX risk mitigation and basically sounds like the CEO of a mortgage REIT, not a semiconductor visionary.

You want risk aversion above all other things.

And you want it for another reason. Mr Chatila has populated the senior ranks of Sun Edison with people like himself. Ambitious go-getters - people who get things done. It is notable that all of the ex Goldman hires at Sun Edison come from the banking and advisory side. They are deal people. Deal people do deals and are not happy if they are not doing deals.

The people Mr Chatila have hired have got things done. Alas if you are going to have people like this in a financial institution (and Goldman Sachs is full of such people) then you need a counter-balance. Someone who stops you doing silly things and has the intellectual horsepower to work out what is silly and what is not. There are plenty of such people around and if Sunedison can poach deal centric Goldmanites then perhaps it can pick up a few slighly more salty risk managers too.

There is an alternative of course. But that is harder. You could keep Mr Chatila. Have a visionary running your financial institution - but then you need to beef up the risk management culture of the place to an extraordinary degree. You need to sack the CFO, half the board need to resign (and be replaced by hard-headed financial types) and you need to remove about half the go-getters that Mr Chatila has installed.

Easy and difficult routes to dullness

This company has got to become dull and predictable and it has to get there fast. Anything short of dull and predictable will end badly.

There is a fast route to dull and predictable (the one I prefer). Start at the top. Sack Mr Chatila. Appoint someone who will embody the new (and boring) Sun Edison. And this guy is going to give the market the sort of information they need - that is

(a). Power purchase agreements and their counter-parties (the analog of credit risk for a non-bank financial institution),

(b). Contract terms for the above PPAs - eg fixed, floating, renewal terms and also for the debt for the projects (the analog of whether there are mismatches in funding), and

(c). The funding details (to ensure that there are not mismatches in the duration of funding).

There is the second route to dull and predictable. That is to leave Mr Chatila in place but sack half the people around him and replace them with people who will control his ambition. This is - in this case - a worthwhile option as Mr Chatila really is a visionary - someone who really has created value.

Whether you can keep the good parts of Mr Chatila (vision, drive) and also keep the market happy has yet to be seen. I have my doubts.

The third way to dull and predictable - and one which will be forced upon the company shortly if the board does not react sensibly is just to put this into a form of run-off. Fire everyone in project development. Just do it. My guess is that they have to start firing now - but a few is not going to do. In runoff they have to fire al the interesting people, leave a skeleton maintenance staff and send us (now suffering) shareholders lots of cash.

My guess is that the board will settle on the first option or Carl Icahn or some equivalently effective activist investor will buy a big stake and force the third option on them.


Tuesday, September 29, 2015

Valeant Pharmaceuticals: some comments

Mike Pearson - the CEO of Valeant Pharmaceuticals - released a letter in response to recent stock price falls. You can find the letter in an SEC filed 8-K. The letter was released before yesterdays 16.5 percent fall.

In the letter they state that [Valeant] "expect the Salix business to represent approximately 20% of our 2016 revenue and expect double-digit script growth and corresponding revenue growth trends to continue".

This surprised me. Valeant sales are over $10 billion per annum. They were 2.695 billion in the last quarter (including sales from Salix).

If organic sales growth is 20 percent and the sales grow double-digit then Salix sales should be at least $2.2 billion during 2016.

During the last year Salix was a public company (2014) Salix revenues were $1.13 billion.

I guess they can square this circle with massive price increases for Salix products. However in the same letter Mike Pearson denies that Valeant's growth is dependent on price increases for pharmaceuticals.

Mr Mike Pearson, I do not believe you.

What would make Mr Pearson more plausible?

There are numerous instances where I have found myself disbelieving Valeant's numbers and PR spin. If you want a really good analysis read AZ Value's wonderful blog. However I keep coming down to people and their personal credibility. You catch way too many strange, even implausible numbers at Valeant.

And there are reasons to distrust the people more generally.

It would be better if the Chair of the Audit and Risk Committee of the board did not have close association with past securities frauds. Let me introduce you to Norma Provencio.

Ms Provencio is founder of Provencio Advisory Services, a healthcare consultancy.  Ms Provencio has been involved with Valeant for some time. She was on the board of legacy Valeant and signed the original offer letter to Mike Pearson in 2008.

Searching the SEC database for "Provencio Advisory Services" not in reference to Valeant turns up a relationship with Signalife (aka Heart Tronics) back in 2007: (p. 19)

And if we go way back, it turns out she participated in the same financing for a predecessor company to Signalife, Recom Managed Services, as an attorney named Mitchell Stein in 2003:

"On May 15, 2003, we completed the first tranche of a private placement pursuant to which we sold 82,667 units to Mr. Mitchell Stein, SJ Investments and Ms. Norma Provencio at $3 per unit for cash amounting to $248,000. Each unit consisted of one common share and one warrant. Each warrant is exercisable at $3 until May 14, 2004. Upon exercise of the warrants each investor will receive one common share and an additional warrant to purchase one common share $6 per share until November 15, 2004."

Ms Provencio was a director of Signalife (aka Heart Tronics), which is not mentioned in her official Valeant biography.  This is a worrisome omission.

Mitchell Stein, the controlling shareholder and Provencio's co-investor got into a bit of trouble and is now serving a lengthy prison sentence.

Here's a mention (including an email from Provencio) in a filing by the defendant Mitchell Stein in his sentencing hearing, claiming that she knew about the transactions at issue:

Ms Provencio wasn't charged, but she was involved since the early days of the company, coming in alongside its principal mastermind and serving as a Director, Audit Chair, and consultant.

This seems like a meaningful omission from her biography and raises questions about her suitability as audit chair for a company as complex and acquisitive as Valeant.

We do not have any affidavits Ms Provencio made in her defence in the Signalife matters - though we have affidavits from other board members who ran the defence that Mr Stein controlled all aspects of Signalife and hence they (as directors) were not responsible. [Kindly this is the "asleep at the wheel" defence.]

Ms Provencio was also in the board of International Aluminum Corp, which went bankrupt at some point back in the mid-2000s (and is not mentioned either).

Approach to relevant Congressional staffers

There is discussion in the news about Valeant possibly receiving subpoenas concerning drug price hikes.

If the congressional staffers concerned want more material on Valeant which helps them target their subpoenas then I can offer some low-level assistance.


Monday, September 21, 2015

Joe Hockey as MiniRAT. Thoughts on his departure

For my non-Australian readers (ie most of them) forgive a little and personal detour into Australian politics.

Joe Hockey was Tony Abbott's Treasurer (finance minister in most countries). He is widely thought of as being one of the weak links in the Abbott Government and has lost his job in the new administration. He is leaving Parliament.

Joe was not someone I agreed with much. My politics are a fair bit to the left of his. But I have a much higher opinion of him than most people and that opinion was from experience.

Early in my career I worked in Tax Policy Division of the Australian Treasury. Much of my work was detail and accounting obsessive studies on what was really going on in tax avoidance schemes and the like. High bandwidth dry stuff.

Most the details parts of tax policy and corporate law is handled by the Assistant Treasurer who used to go by the awful monicker of "Minister for Revenue and Assistant Treasurer". The wags always shortened this to the MiniRAT.

When I was at the Treasury we had several MiniRATs some of whom were unimpressive. However I had a bit to do with Joe Hockey when he was MiniRAT and found that he was enormously quick at getting across the brief. He did not always agree with the Treasury advice - but he was able to enunciate the issues. He asked exactly the right questions - and sometimes questions we had not thought through ourselves.

Joe had the bandwidth. I mean really properly. Joe was sharp.

When he became Treasurer I had very high expectations. And I was mostly disappointed. As Treasurer he never looked the part.

I do not know why. Partly I think it is hard to be a rational finance minister when you have an ideologically driven (rather than pragmatic) Prime Minister. Tony Abbott did not care for the numbers and that makes it hard to win on the numbers.

Some people think he was just lazy. Smart but lazy. I see no evidence.

Maybe he did not have the support necessary to carry things in Cabinet. I am an outsider these days. I do not know.

I was disgusted at the way Martin Parkinson was railroaded out of the Treasury Secretary job (permanent head job in the UK context). That lowered my opinion of Joe - but again I was not privy to the politics.

That said Joe, if you are reading this. Good luck in the future.

Also here is some unsolicited advice to anyone who winds up in his future. Be aware that underneath the political bluster is a fine mind.

I hoped for and expected a better end to Joe's career. But then maybe this is not the end of his career.


Thursday, September 17, 2015

FOIA request to the SEC about Pershing Square market manipulation and Herbalife

This is posted without comment. The original can be found here...


Re: Freedom of Information Act (FOIA), 5 U.S.C. § 552 

Request No. 15-06335-FOIA 

Dear Mr. Hempton: 

This letter responds to your request, dated and received in this office on September 8, 2015, for any documents responsive to the claims that the SEC has investigated market manipulation in Herbalife stock by or on behalf of Pershing Square – the hedge fund run by Bill Ackman. 

We are withholding records that may be responsive to your request under 5 U.S.C. § 552(b)(7)(A), 17 CFR § 200.80(b)(7)(i). This exemption protects from disclosure records compiled for law enforcement purposes, the release of which could reasonably be expected to interfere with enforcement activities. Since Exemption 7(A) protects the records from disclosure, we have not determined if other exemptions apply. Therefore, we reserve the right to assert other exemptions when Exemption 7(A) no longer applies. 

It is the general policy of the Commission to conduct its investigations on a non-public basis. Thus, subject to the provisions of FOIA, the Commission does not disclose the existence or non-existence of an investigation or information gathered unless made a matter of public record in proceedings brought before the Commission or in the courts. Accordingly, the assertion of this exemption should not be construed as an indication by the Commission or its staff that any violations of law have occurred with respect to any person, entity, or security. 

Because the underlying circumstances may change, we may later disclose some of the exempt records. If you wish, you may request them again six months from the date of this letter. 

I am the deciding official with regard to this adverse determination. You have the right to appeal my decision within 90 calendar days from the date of this letter to our General Counsel under 5 U.S.C. § 552(a)(6), 17 CFR § 200.80(d)(5) and (6). Your appeal must be in writing, clearly marked "Freedom of Information Act Appeal," and should identify the requested records. The appeal may include facts and authorities you consider appropriate. 

You may file your appeal by completing the online Appeal form located at, or mail your appeal to the Office of FOIA Services of the Securities and Exchange Commission located at Station Place, 100 F Street NE, Mail Stop 2465, Washington, D.C. 20549, or deliver it to Room 1120 at that address. Also, send a copy to the SEC Office of the General Counsel, Mail Stop 9612, or deliver it to Room 1120 at the Station Place address. 

If you have any questions, please contact Warren Jackson of my staff at or (202) 551-8312. You may also contact me at or (202) 551-7900. 


Jeffery Ovall 

FOIA Branch Chief 

Wednesday, September 16, 2015

Job interview questions: The size and scope of Alibaba

Recently Bronte advertised for an entry level position. We have now hired.

There was one interview question which nobody gave an entirely satisfactory answer to, and many people gave unsatisfactory answers to.

This is not surprising. I don't have an entirely satisfactory answer either. The question was about Alibaba - the Chinese internet giant - and the only reason I am going public is that Barrons has asked several of the same questions and Alibaba has responded.

As preamble I told the prospective employees what Alibaba was and what Singles Day was. This was graduate recruitment so I could not be sure that everyone would know even that. So I said:

i). Alibaba inside China is the biggest but not only online shopping site with Tabao and TMall. These were essentially flea-markets where lots of people had stalls (shops within shops) and they sold a huge number of items. Think of it as a combination of Amazon and Ebay and you will not be far wrong.

ii). Alipay is the standard way of paying for something online. Think of it as the equivalent of PayPal. Note there is a major competitor (Tenpay).

iii). Singles Day is a sort of anti-Valentines Day. On Valentines Day if you are attached you go out with your beloved. On Singles Day you go out and try to find a beloved. However more importantly it was the big day of online sales - think of it as Black Friday in America or Boxing Day in Australia. It is the biggest shopping day of the year.
    I then gave the candidates two stories about Alibaba on Singles day. One was sourced from the BBC and one from an Australian website. The BBC reported in US dollars, the Australian site reported in Australian dollars. [Ultimately both are sourced from an Alibaba press release.]

    I also indicated that the questions would be along the lines of "how interesting is this" and "how much bigger can it get". The rule of thumb of course is that if an internet company can grow 500% from here you probably should own the stock. However if it is near the end of its growth period you should not own the stock - because it will derate.

    Here were the articles - and I want you to read as if you were doing the job interview. Allow yourself 15 minutes...

    The BBC article...

    and the Australian article...

    Starting question: How much bigger can this get?

    Lots of people started by arguing from China's growth rate - and they got projections 5x, 10x bigger than now. But a few noted that 278 million deliveries on Singles Day was "a lot" and thought that maybe it could double from here but ten times was not likely.

    But at this point I wanted to explore the 278 million deliveries number. So the question is "how many internet users in China". Most people guessed a number that was reasonable - so I pointed them to official numbers. Roughly 650 million would be a good guess. The official number at the end of 2013 was 618 million - and the growth rate has already slowed.

    So there was 278 million deliveries for a total prospective 650 million users. In one day! The question is how much bigger can this get and what drives it to be bigger?

    I then pointed them to official numbers that said that Amazon (worldwide) had 244 million users. That was 244 million separate accounts made at least one order in the past twelve months. The Amazon numbers are here.

    Alibaba delivered more parcels in a single day than Amazon had users in a whole year.

    Most people then figured that the users had multiple deliveries which is I guess a possibility. However it worth comparing this to Cyber Monday in the US. This article - which I presume is accurate - gives Amazon orders for Cyber Monday. To quote:
    In order to uphold its reputation for fast deliveries, Amazon hired 80,000 seasonal workers in anticipation of Cyber Monday and the holiday shopping season, according to a report released by the company. Last year, Amazon sold about 426 items per second on Cyber Monday, and the online retailer expects to sell even more this year.
    426 items per second is almost 37 million items. This is more directly from an Amazon press release. Singles day is 7.5 times bigger. To match Amazon in timeliness of delivery they would need to hire 600 thousand seasonal workers who work at the same efficiency as Amazon workers. Note that Amazon workers work with a lot of robots and other technology to pick and file and deliver items.

    The Alibaba 20-F (the SEC filed annual report) does not show anything like this number of employees... to quote:

           As of March 31, 2013, 2014 and 2015, we had a total of 20,674, 22,072 and 34,985 full-time employees, respectively. Substantially all of our employees are based in China.
           The following table sets out the breakdown of our full-time employees by functions as of March 31, 2015:
    Number of
    Customer service

    The number of employees presented in this table does not include third-party consultants and contractors that we employ, substantially all of whom are based in China. These consultants and contractors primarily performed work related to sales, research, logistical support and customer service.
    Our total number of employees increased to 34,985 as of March 31, 2015 from 22,072 as of March 31, 2014. Of the increase in employees, approximately 7,300 was due to the completion of our acquisitions including UCWeb, OneTouch, Alibaba Pictures and AutoNavi, and a majority are engaged in engineering and data analysis.

    At the accounting date the total number of employees was under 35 thousand. Amazon - which has much smaller peak loads and far more obvious investment in high efficiency warehouses has more than 150 thousand employees.

    However Footnote 1 on the above table notes that this does not include "third-party consultants and contractors that we employ, substantially all of whom are based in China. These consultants and contractors primarily performed work related to sales, research, logistical support and customer service."

    If Alibaba were as efficient as Amazon (meaning just as many computers/robots etc) and had the same delivery schedules as Amazon there would need to be about a million employees at Alibaba and its consultants and another 600 thousand or so seasonal employees around Singles Day.
    These numbers are consistent with the annual report.

    Again to quote the 20-F.
    We believe that orders from transactions generated on our marketplaces represented a significant portion of our delivery partners' total delivery volumes in the twelve months ended March 31, 2015. According to data provided by them as of March 31, 2015, our top 14 strategic delivery partners employed over 1,400,000 delivery personnel in more than 600 cities and 31 provinces, directly controlled municipalities and autonomous regions in China. Collectively they operated more than 100,000 delivery stations. This network managed the delivery of over 8.6 billion packages from our China retail marketplaces to consumers in the twelve months ended March 31, 2015.
    It may be possible that Alibaba has outsourced logistics almost entirely - with a million outsourced employees controlled by 35 thousand in-house employees. The numbers in the annual report are consistent with this. This however is a much more "virtual" view of Alibaba than I had previously held. Amazon wins through logistical superiority. You would not want to compete with them. Alibaba it seems wins through logistical outsourcing of the highest quality.

    We should also note the scale of the 8.6 billion packages the network claims to have delivered. UPS delivered 4.6 billion packages per year and had 435 thousand employees, 539 aircraft (including charters), about 100,000 delivery vehicles and almost 2000 operating facilities. [UPS factsheet here.]

    To truly deliver at a larger intensity than Amazon Alibaba and its outsource network would need more staff or capital (or both) than Amazon and UPS combined.

    The size and scope of Alipay

    Only a couple of my candidates (all of whom wound up on the short list) noticed the throw-away line in the Australian article about the size of Alipay. To quote:
    At the peak of the event, 2.85 million transactions were processed every minute by Alipay.
    Now I asked "how many transactions per day do you think is 2.85 million in the peak minute"? 

    If they started to multiply by 60 and then 24 this was a problem. Obviously the peak minute is much higher than the volume at 3AM. I mean when have you ever used PayPal at 3AM? The peak day is obviously enough less than 24 hours worth of the peak minute.

    A pretty good guess is that the peak day should be between 4 and 9 hours of the peak minute (in other words the peak day is somewhere between 2.85*60*4 million transactions and 2.85*60*9 million transactions). This seems sensible. I have discussed with several people in the payment industry the ratio of peak minute to peak day volumes and got numbers in this range - but I do not have definitive numbers. [If someone from PayPal or Visa wants to come through with something definitive I would like it.]

    7 hours of peak minute (which my informal research says is reasonable) is about 1.2 billion transactions in the day. That is two per internet user in China. That is to say a large number.

    Now Alipay is roughly the equivalent of PayPal. It might be used more than PayPal because people send remittances on it. It is unlikely to be used as much as Visa. After all Visa is used in the shops all the time. Look at your own life and ask yourself how much you use Visa and how much you use PayPal.

    We can do a comparison to Visa. Visa overbuilds capacity - they have built capacity to 56 thousand messages per second. We know from another press release that was about 4 times the actual peak in 2013. So the 2013 peak was 14,000 transactions per second - which is 840 thousand per minute.

    Visa's peak transaction volume globally is only about 30 percent of Alipay's peak minute. This suggests a level of shopping in China that puts the US, Europe and most of Asia to shame.

    So I asked: Are there any other ways of reconciling these numbers?

    Some people suggested (a) multiple deliveries for items, (b) that many of the items delivered were virtual items such as emoji and their delivery is not technically problematic and (c) insufficient data handling capacity and hence queuing explaining the almost absurdly large peak minute on Alipay.

    So I asked: How would you test this. And I got some interesting answers - some of which might require a little work to pan out. However some answers wound up looking silly. If you think for instance that a substantial proportion of the transactions are low-value emoji then the remaining transactions wind up with implausibly high average value. 

    But a few - knowing Bronte's history - suggested that we could not dismiss the idea that Alibaba was faking their numbers.

    Most people who suggested that knew what an extraordinary (and potentially outrageously profitable) suggestion it was. After all some two-bit reverse merger Chinese company might be a fraud - but you can only make a limited profit from that. The idea that Alibaba - a company with half the market cap of Google might be making its numbers up is - well - extraordinary.

    So I responded - fairly - that 

    (a) extraordinary claims require extraordinary evidence (known ubiquitously as the Carl Sagan standard), and

    (b) extraordinary claims offer extraordinary opportunities for profit (as the market is very wrong) and hence it might be worth gathering the evidence so we can accept or reject the extraordinary claim.

    And so here was the key point to the question: how would we go about gathering that evidence and what sort of evidence would you require to put the trade (short Alibaba) on?

    I should be clear that I do not have the extraordinary evidence - but I do think it is a thesis worth testing...

    This was a tough question - and I did not expect many (if any) good answers. So I am going to leave it to you dear readers for comments. I am perfectly willing to accept answers which demonstrate that the "fake numbers" thesis is wrong. Indeed the thesis is extraordinary and hence likely to be wrong.

    However before I go I should look a little at delivery data. The 20-F (quoted above) suggested that the delivery network had 1.4 million employees and over 100,000 delivery stations. This suggests an average of 14 employees per delivery station and there must be a huge number with less than 10 employees including the truck drivers who actually do the delivery.

    There was a Wall Street Journal story recently about delivery infrastructure in the provinces. There was a picture of a delivery station in Northeastern China. It was - to put it mildly - crude.

    Another image of even more crude sorting technology heads a Bloomberg article:

    Ramping something with this lack of automatic sorting technology up for Singles Day would require a lot of staff. Some candidates thought of trying to count them.

    With 100,000 delivery stations it is unlikely to be possible to do it on a statistical basis by counting trucks. There are far too many locations and they are too heterogeneous. 

    Maybe you could do it with official employment numbers. But in China that is almost certainly a dead end. Chinese employment numbers are amongst the most suspect of all Chinese economic data.

    Alibaba's own promotion material contains several videos of their logistic operations. Here is a video interview of a woman describing the seasonal work packing boxes for Singles Day.

    The woman states she will normally pack about 200 packages a day but on Singles Day she will do 800-900. If it takes her 50 seconds to pack a package (reasonable looking at the process) and she takes 5 minutes break per hour packing 800 packages will take about 12 hours. I guess that is reasonable. But to do the volume for Singles Day would require 350 thousand such people just in packaging, not even delivering.

    The company has videos of its logistics as well. Here is a summary video - with pictures of the delivery network:

    (The original can be found here...)

    The company also has b-roll material (which they license widely) which has quite extensive video of the conveyor belt systems and the sort.

    Strangely much of the material involves people standing around and multi-handling material on conveyor belts rather than doing the real function of a sorting facility (that is making choices therefore sorting).

    Similarly there is b-roll material of packaging happening in one of Tabao's merchant shops. This involves distinctly low-tech (and slow) packaging and sorting for Singles Day. It is however clearly in part aimed at a Western audience (and presumably Western investors) as the whiteboard is in part in English.

    We have some data about the size and the amounts of capital deployed in this delivery network. Here is a relatively old fact sheet (stated volume has risen substantially since then).

    Here is an article and video about Alibaba/Tabao rural service centers:

    There is some evidence in this video about people making multiple orders as in some rural centers there is a single woman who places multiple orders for an entire village. The distribution center however is not heavily endowed with advanced technology. There is no evidence that in any way the capital equipment at Alibaba and its distribution partnership comes close in scale and quality to the infrastructure of (say) UPS. However the delivery volumes are larger than UPS and Fedex combined and the employment levels are similar (in aggregate).

    It is worth comparing this to videos of Amazon's warehouse and packing system.

     There is also a Fedex and UPS documentary on Bloomberg which gives some idea of the scale of these behemoth organisations. When this was filmed (2012) the combined volume of UPS and Fedex was well below the volume of Alibaba's delivery network. Still it is worth comparing how much capital equipment the US giants have to how little is in the Alibaba network:

    At this point I know the numbers are wonky - but working out whether this is material or not (or how material) will require some fine measurement techniques. 

    The two best candidates both had good ideas on this - but again testability is going to be hard. I would accept ideas by email too.



    General disclaimer

    The content contained in this blog represents the opinions of Mr. Hempton. Mr. Hempton may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Hempton's recommendations. The commentary in this blog in no way constitutes a solicitation of business or investment advice. In fact, it should not be relied upon in making investment decisions, ever. It is intended solely for the entertainment of the reader, and the author.  In particular this blog is not directed for investment purposes at US Persons.