Investment Ideas From the Edge of the Bell Curve
The ASX 200 notched its worst trading day of 2023, closing a whole 2.28% lower on Friday.
On a weekly basis, the benchmark index has fallen for the fifth straight week, lowering its year to date gains to 2.9%.
The energy sector led the index lower, falling 3.36% for the day and 6.13% for the week.
What timing.
Just months after Douglas Diamond and Philip Dybvig were awarded the 2022 Nobel Memorial Prize in Economics for their influential model on bank runs, Silicon Valley Bank suffers one of the worst bank runs in decades.
Overnight, SVB Financial sought to reassure clients their deposits were safe after its stock fell over 60% in one day following an urgent capital raise to shore up its balance sheet.
The bank needed the extra capital to offset losses incurred from selling its doomed US$21 billion bond portfolio that consisted of low yielding US Treasuries.
SVB’s plunge tainted other major US banks, contributing to the wiping out of over US$80 billion in value from bank shares.
The problem for Silicon Valley Bank is spooked clients triggering a bank run.
Already we have Peter Thiel advising portfolio companies to withdraw money from the bank.
New w/ @Katie_Roof: Founders Fund, the VC firm founded by @peterthiel is advising portfolio companies to withdraw $$ from $SIVB https://t.co/RZIZAQsQ5B
— Gillian Tan (@GillianTan) March 9, 2023
In fact, SVB is facing a vicious cycle. Investors fearing a run on SVB and tanking its share price in the process may very well contribute to the fear’s realisation.
These fears about a bank’s liquidity were a key concern for economists Dimond and Dybvig, whose work on bank runs secured them a Nobel in 2022.
In a summary of their work, the Royal Swedish Academy of Sciences wrote:
“It is easy to see that maturity transformation is valuable to society, but the laureates also demonstrate that the banks’ business model is vulnerable. A rumour may start, saying that more savers than the bank can cope with are about to withdraw their money. Regardless of whether this rumour is true, it can send depositors rushing to the bank to withdraw their money in case the bank goes bankrupt. A bank run ensues. In an attempt to pay all its depositors, the bank is forced to recover its loans early, leading to long-term investment projects being terminated prematurely and assets being sold in fire sales. The resulting losses may cause the bank to collapse.”
Source: nobelprize.org
Delving into the pair’s work further, the Academy wrote:
“Diamond and Dybvig (1983) modelled the maturity transformation role of banks. Many investment opportunities are long-term, while investors value short-term liquidity, i.e., the ability to withdraw their savings for immediate consumption if needed. The role of banks is to aggregate the savings of investors and invest in long-term projects. Only a fraction of investors will actually need to exercise their option to withdraw their savings early, since only a fraction of investors will be subject to short-term liquidity needs. This makes it possible for the bank to meet the liquidity needs of short-term investors, while investing their savings in productive long-term projects.
Diamond and Dybvig argue, however, that this maturity transformation makes banks inherently fragile and subject to self-fulfilling bank runs. The problem arises from the fact that if the bank had to liquidate all long-term investments early (at a loss), there would not be enough funds to cover all deposits. If a depositor believes that the other depositors will withdraw their funds from the bank, thereby forcing the bank to liquidate its long-term investments prematurely, she will also run to withdraw her deposits before the bank runs out of funds.
Diamond and Dybvig show how government regulation, such as deposit insurance or lender of last resort policies, can help avoid such coordination failures. Their model provided a unified and logically consistent framework for many of the informal arguments in the previous literature, and it stimulated a large subsequent literature that has yielded new fundamental insights on issues such as financial contagion, inside money creation, financial propagation, and financial regulation.”
For one, hedge fund manager Bill Ackman thinks if a private market solution doesn’t present itself, a ‘highly dilutive government preferred bailout should be considered.’
The failure of @SVB_Financial could destroy an important long-term driver of the economy as VC-backed companies rely on SVB for loans and holding their operating cash. If private capital can’t provide a solution, a highly dilutive gov’t preferred bailout should be considered.
— Bill Ackman (@BillAckman) March 10, 2023
CATL, the world’s largest maker of electric car batteries, reported a large increase in annual profit days after China’s president Xi Jinping warned CATL’s market leadership could come with risks.
Earlier this week, Xi said he was ‘nascent industries should … figure out where the risks are and avoid penetrating deep into enemy territory alone, only to be caught by others and get wiped out.’
A market leader is a global leader. And global leadership comes with a global supply chain. That carries risk at a time of strained US-China relations.
For the moment, though, CATL’s top status is bearing fruit.
The battery maker reported an annual net income of Rmb30.7 billion (~$6.7 billion) in 2022, up 93%. Full year revenue jumped 152% to a record Rmb328.6 billion (~$71.7 billion).
Last week, I mentioned an economic paper that focused on sellers’ inflation. That is, instead of the usual macroeconomic explanations for the rising price level, the paper identified another — microeconomic — variable.
The ability of large firms with market power to hike prices during volatile periods. And we’re definitely in one such period now.
Overnight, Bloomberg’s Odd Lots pair Tracy Alloway and Joe Weisenthal ran a great piece expanding on the concept, adding the colour an academic paper lacks (understandably).
“”Whether it’s rye flour, or bird flu that impacts eggs,” said Ken Jarosch, the owner of Jarosch Bakery, “when it makes national news, just running a business, it’s an opportunity to increase the prices without getting a whole bunch of complaining from the customers.”
“It’s not the kind of thing you typically hear a business owner express publicly but Jarosch was simply stating late last year his philosophy about when it’s safe for a business such as his — a midsized bakery in the Chicago suburbs — to hike prices for cookies, cakes and other carbs. He had the idea long before Covid upended supply chains, realizing he could quickly push through price increases when news hits of some big shock to the economy because there’ll be less pushback from customers right then.
“Now, a growing body of analysts and researchers see this pattern playing out across Corporate America, with companies using unusual disruptions as an excuse to raise prices for their goods and services, thereby allowing them to expand profit margins.“And over the last few years, businesses have been able to point to a smorgasbord of “once-in-a-lifetime” emergencies stemming from the pandemic and Russia’s invasion of Ukraine, which together have effectively roiled everything from semiconductor production to commodities markets and shipping.”
Corporate concentration is a possible explanation of price and profit hikes driving inflation. But concentration was high before inflation. So, why can firms hike prices in an emergency? We explore this question in a new working paper. A 🧵https://t.co/ZWqkm5YFOn pic.twitter.com/tnzSIiG9xk
— Isabella M. Weber (@IsabellaMWeber) February 27, 2023
But Bloomberg wasn’t the only one adding colour to the concept of sellers’ inflation.
Wall Street Journal’s Nick Timiraos pitched in by sharing a response from Richmond Fed president Tom Barkin on the topic.
I asked the Richmond Fed president, Tom Barkin, about this phenomenon last September (spurred in part by @SamuelRines excellent analysis of earnings calls).
Barkin, a former McKinsey partner, made an interesting observation about the casual dining space: pic.twitter.com/nJg5Ebyr2q
— Nick Timiraos (@NickTimiraos) March 9, 2023
Losses never felt so good.
Despite wiping out nearly US$10 billion of investors’ cash, Cathie Wood’s Ark Investment Management earned more than US$300 million in fees for its exchange traded fund since the fund’s inception in 2014.
Quoted in the Financial Times, Elisabeth Kashner, director of global funds, research and analytics at FactSet, quipped:
“Investment fees have provided ARK and Cathie Wood a very good living. Her investors haven’t been so lucky.”
As the FT noted:
“Since inception, ARKK investors have lost nearly 27 per cent in dollar- weighted returns — meaning on average, every dollar invested in the fund is now worth 73 cents, according to FactSet. Investors who bought at the peak are down more than 74 per cent.”
ASX lithium stocks are under heavy selling pressure today as lithium carbonate equivalent prices in China fell to the lowest level in over a year.
Chippy, AKA the Champlain Hudson Power Express (CHPE), is quite the infrastructure project.
The US$6 billion transmission line, which is scheduled to start operating from 2026, will bring hydropower from dams in Quebec, Canada to Queens, New York.
You’ve likely seen those high, ugly, and bulky transmission line towers before.
So what’s interesting about CHPE is that much of it runs underground and underwater through the Hudson River:
Once finished, the CHPE will be the largest built underwater and underground transmission line in the US, supplying about 20% of New York’s electricity needs.
CHPE is a big step in helping New York get closer to its target of getting 70% of its power from renewables by 2030.
But it’s not the only US transmission line project in the works out there. As you can see below, there are several firing up at the moment:
As Bloomberg reported this week:
‘For more than a decade, multibillion-dollar power-line projects have struggled to advance, slowed or halted by bureaucracy, NIMBYism or general industry stasis. Now suddenly, several are progressing — and with them the prospect of newly unleashed clean energy as well as more resilient grids in the face of ever-dangerous storms and extreme heatwaves.
‘“All of a sudden things are happening,” says transmission pioneer Michael Skelly.
‘While long-distance power lines are tedious to get permitted and approved, building transmission is now a top priority for the US renewable industries.’
Much has to do with the passing of the US Inflation Reduction Act, which set aside US$760 million in grants for transmission lines, while creating confidence the energy transition will continue to move along.
But the US isn’t the only country where power line projects are coming to life…
China is planning on investing US$300 billion in a national network of power lines.
And, here in Australia, Queensland just announced it’s spending $5 billion on the CopperString 2.0 power line. The line will connect Mount Isa to the grid and will be an important power source for mining in the area.
And expect to hear more about transmission lines because…
https://www.moneymorning.com.au/20230310/without-this-wind-battery-and-solar-projects-are-useless.html
Well, well, well. How the turntables…
One moment you’re issuing short reports on Vulcan Energy (ASX:VUL) and Lake Resources (ASX:LKE) and the next you’re joining a fellow lithium junior Anson Resources (ASX:ASN) as its chief operating officer.
It may sound improbable, but that’s exactly what J Capital’s Tim Murray has done.
Murray joined Anson Resources as its COO post the December 2022 quarter after being a notable sceptic of popular lithium juniors aiming to introduce new extraction methods to the industry.
That scepticism led to a Vulcan Energy lawsuit, which was settled in 2021.
So what changed?
Murray told the AFR’s Tom Richardson that he saw the light after realising the ‘huge potential’ of Anson Resources:
“It’s sort of like the Holy Grail in lithium mining,” Murray says of Anson’s potential to use new direct lithium extraction (DLE) technologies to produce the key ingredient used in batteries.
“Because the [conventional] process to make batteries involves a lot of waste. It’s dirty, there’s lots of water and chemical usage, lots of coal power too. But this is different, that’s why it’s so attractive because you get green lithium through this process. That’s how I went from sceptic to believer.”
J Capital co-founder, activist shorter & federal parliamentary candidate Tim Murray has joined an ASX #lithium stock he says is a 'screaming buy' thanks to its next-gen tech $ASN https://t.co/ean3hzgPQY
— Tom Richardson. (@tommyr345) March 9, 2023
Blue Orca issued its take on Piedmont Lithium’s (ASX:PLL) response to its short report.
Blue Orca wanted both Piedmont and Atlantic Lithium (ASX:A11) to address corruption charges head on, thinking the lithium pair didn’t delve into the specifics enough.
The short seller also claimed that Piedmont has thrown Atlantic Lithium under the bus:
‘PLL is already throwing its key partner under the bus, saying if it cancels [the] Ghana offtake, it will find alternative sources of spodumene. Where? When? The entire point of PLL’s Ghana investment is that alternative sources are not available.’
Blue Orca thinks $PLL's response to its short report has thrown $A11 under the bus. #ASX #lithium #A11 https://t.co/7tzN4V3rWG
— Fat Tail Daily (@FatTailDaily) March 10, 2023
In its response — which did not delve into the details of Blue Orca’s short report — Atlantic Lithium said it believes Ghana’s Minerals Commission will grant a mining license for its Ewoyaa lithium project.
A11 also believes Ghana’s parliament will ratify its mining license ‘in due course’.
Atlantic Lithium said it has a ‘zero-tolerance policy on bribery and corruption’.
All allegations made by Blue Orca ‘have been taken seriously by the company and are ungrounded’.
Blue Orca considered Atlantic’s response weak.
Nothing response from Atlantic $ALLIF, which doesn’t even deny that it paid the head of the Olympic committee and the son of a leading Ghana politician for mining licenses. $PLL
— Blue Orca Capital (@blueorcainvest) March 9, 2023
Yesterday, Blue Orca Capital published a short report on lithium juniors Piedmont Lithium (ASX:PLL) and Atlantic Lithium (ASX:A11), alleging that key mining licenses in Ghana were acquired by corrupt means.
Piedmont has an equity stake in Atlantic and wants to convert the lithium spodumene from A11’s Ghana mine at its planned conversion facility in Tennessee.
If the corruption allegations are borne out, Blue Orca thinks Atlantic’s mining licences won’t be ratified and Piedmont won’t get its crucial supply of spodumene.
Today, the pair responded.
Atlantic said Blue Orca’s report was false and misleading, adding:
“The Company holds valid Prospecting Licences with operating permits for all of its current activities, in accordance with the Ghanaian government and the Minerals Commission’s requirements, and outrightly refutes the allegations of impropriety made by the Report.”
While both responses were short, Piedmont’s was terser.
Piedmont leaned on Atlantic’s reply, recapitulating the latter’s rejection of Blue Orca’s allegations.
Interestingly, the longest paragraph in Piedmont’s response was directed at Blue Orca’s claim that Piedmont would be unsuccessful in finding alternative supply if the deal with Atlantic falls through:
“Piedmont has the right to purchase 50% of Atlantic’s production of spodumene concentrate from its Ghana lithium project, at market prices on a life-of-mine basis, and to earn a 50% interest in the Ghanaian projects. Piedmont currently contemplates utilizing spodumene concentrate from this offtake agreement as partial feed for its proposed Tennessee Lithium hydroxide plant. However, if for any reason Piedmont does not exercise its right to this offtake supply, the Company is confident that alternative sources of spodumene concentrate would be available to feed the Tennessee facility, as current and future spodumene producers seek to feed the growing U.S. electric vehicle market and qualify for the benefits available under the Inflation Reduction Act of 2022.“
Both said they will seek legal advice.
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Investment ideas from the edge of the bell curve.
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