The Beef We Never Asked For (But Will Thoroughly Enjoy) Has Arrived

“CNBC – Facebook CEO Mark Zuckerberg fired back at Tim Cook, arguing the Apple CEO’s recent criticism about the social media company and its handling of the Cambridge Analytica scandal was “extremely glib.”

Now we’re talking. Last week, super nerd Tim Cook decided it was time to talk some unprovoked shit about Facebook, and proceeded to stuff billionaire alien, Mark Zuckerberg, in a locker. Cook was trying to make the point that because Apple sells products vs. offering a free service, they’d never find themselves in the position of selling their users’ private information to advertisers and data miners for monetary gain. I was surprised (but delighted) he chose to open his mouth, because that’s just asking for an embarrassing data privacy issue of your own.  Zuckerberg fired back at Cook on former WaPo wonk, Ezra Klein’s podcast. After mustering up all of the social skills he managed to observe and replicate in his thirty-three years on this planet, he called Cook’s comments “extremely glib” and said that the small-brained human race is suffering from an Apple-induced episode of Stockholm Syndrome. BURN.

This is a battle that Zuckerberg just can’t win. Cook may be a nerd, but he’s infinitely more likable (and human) than Zuckerberg is. Anyone that read Accidental Billionaires or saw The Social Network knows the weight of self-consciousness Zuckerberg carries around is so massive, it may very well collapse in on itself one day, creating a black hole so powerful that no data miner could ever suck information out of Facebook’s servers again. That same self-consciousness morphed into a sense of resentment throughout his college years, when he couldn’t fathom why his intelligence wasn’t valued by the broader swath of society (chicks def included). People pick up on that kinda stuff, and it makes that individual seem off-putting, which is why Zuck can’t win this fight. People have known the guy is a weirdo for years, and we’ve been waiting for a reason to not like him – which has finally arrived. So sit back and enjoy the show folks, because each time he concludes an interview that doesn’t help save his image (or his stock price), he is sitting there, stewing in his big alien brain, reverting back to his adolescent years, wondering why the broader swath of society JUST. CAN’T UNDERSTAND. That’s when the meltdown will begin, like when J.P the Robot get’s that voicemail in “Grandma’s Boy” (which is in the hall of fame of underrated flicks, just behind “That’s My Boy”).

I would like to point out: maybe we are suffering from an Apple-induced episode of Stockholm Syndrome? The Company literally admitted to throttling performance on older iPhones (accidentally, of course) and nobody cared. That was always amazing to me.

You Cryan, Boy?!

“Reuters – Large investors in Deutsche Bank have urged its chairman to provide a clear signal on whether the board backs the lender’s embattled chief executive or not…“

Dead man walking. John Cryan is inevitably out as CEO of Deutsche Bank, and the announcement will come sooner rather than later. He was appointed CEO in 2015 after their board gave Anshu Jain his walking papers. So now, after a few years of unlimited brats and kraut, it looks like this native Briton is back to bangers and mash.

You hate to see someone get embarrassed on the public stage like this, but you also hate to hire someone who sucks at their job. Cryan was unable to maximize shareholder value, which is like, prerequisite #1 for being CEO of a bank. It is worth noting however, that he didn’t inherit a perfectly healthy institution, either – but he knew what the job entailed and came out of the gates with an ambitious restructuring plan called “Strategy 2020”. The whole thing was predicated upon firing a few thousand employees, raising come capital and reducing costs. Pretty standard stuff.

His real problems started in Q3 2016, when the U.S. government levied a $14B (eventually settled for $7.2B) penalty on the bank related to the marketing of crisis-era RMBS. In response to the financial crisis, European banks were required to raise capital to buffer themselves against a future crisis, and they used Contingent Convertibles (CoCos) to do it. These securities are designed to be wiped out first in the event of a credit crisis, forcing creditors to bail-in the banks vs. having central banks bail them out. Once news of the U.S. fine hit, DB CoCos got pummeled because markets knew they couldn’t pay up based on their cap structure at the time. Long story short, this whole mess wiped billions in market cap off the Company and forced it to raise $8B in equity a few months later – at a 35% discount (sheesh)!

Fast forward to today and the Company hasn’t turned a profit in THREE YEARS. Imagine that, a bank not being able to turn a profit in 2017. You gotta fire this guy, and I’m surprised it took so long. The ironic part is that he knew DB had to raise that $8B to save the bank, and the same guys he sold the equity to are making calls directly to the board to fire his ass. Tough look, John. Tough look, indeed. So let’s raise a glass to John Cryan, because at the end of the day, he no longer needs to live in Frankfurt – and that my friends, is a victory in and of itself.

Walmart Buying Companies Because Its Competitors Are

Healthcare is an interesting space right now. It seems everyone can feel that change is coming, but nobody actually knows how it’ll materialize. This has resulted in a wave of product announcements and M&A activity from companies that want a piece of the lucrative, yet complex, healthcare pie, and yesterday was no different:

“Bloomberg – Walmart Inc. is in talks with health insurer Humana Inc. for a closer partnership to provide health care to consumers at home and prevent illness, according to a person familiar with the matter.”

News broke last evening that Walmart is in talks with Humana about a much deeper partnership, and possibly an outright acquisition of the insurance company. This is a reactionary deal from Walmart on the heels of the CVS / Aetna transaction, which was a reactionary deal to Amazon entering the space – and that, my friends, is really what this is all about: Jeff Bezos and Amazon’s healthcare ambitions. The Company has announced a healthcare partnership with J.P. Morgan / Berkshire Hathaway, as well as intentions to pursue its own internal initiatives. Amazon has been tight-lipped on their approach, but it is widely assumed they’re going after the pharmaceutical distribution channel, a likely target given Amazon’s logistical and distribution expertise. This would not be welcomed news for companies like Express Scripts (who was acquired by insurer Cigna earlier this month), who manage pharmaceutical benefit plans on behalf of employers by negotiating drug prices with pharmacies and processing claims payments. Amazon would look to put the screws to these middlemen by applying their tried-and-true business model of undercutting on price and over-delivering on service. Amazon will succeed here, as it always does. The issue for pharmacy companies (Walmart, CVS) is to figure out a way to bypass being forced into business with Amazon as they enter the space. Their answer? Buy the insurance companies and handle the middleman activities in-house, building out an entire healthcare network under one roof for their millions of loyal customers. It really isn’t a bad idea and probably one of the best responses to Amazon encroachment I’ve seen. The only hurdles outside of regulatory burden will be sourcing adequately-priced deals and how to pay for them. CVS decided to go the debt route and the markets have been less than pleased. It’ll be interesting to see how it plays out, but I’ve got my chips on Jeff being the most disruptive new entrant into the space.

Here’s the Thing About Energy Markets…

“Bloomberg – A pipeline shortage that’s leaving gas trapped in West Texas’ Permian Basin means prices for the fuel there are the lowest of any major U.S. hub, wresting that distinction from Appalachia’s Marcellus Shale. Prices for Permian gas, produced alongside oil in the play, have tumbled 32 percent from a year ago, while output rose to a record. And the pipeline crunch is also pummeling the region’s oil market.”

Energy production has always been a highly capital-intensive business. The dirty little secret of the U.S. shale boom is that fracing (not fracking, that’s how they can tell who the Yankees are) is not cheap, no matter what it costs to fill your car up at the pump. The costs of equipment, surveying, labor, licensing, water, sand and waste handling will run into the millions before a single well even comes online. So what did the industry do to juice their returns and ease the burden on their end consumers? Everyone, say it with me now: they levered up! It’s no coincidence the U.S. shale boom coincided with the post-crisis era of cheap money. The ability to voraciously borrow money from investors looking for anything resembling a decent yield fueled the fracing boom, as well as its eventual demise.

I spent a few years in Houston at an energy-focused PE shop, so this is a topic that’s near and dear to my heart. The U.S. energy markets have been in disarray since the end of Q2 2014. Throughout the shale boom, the strategy for oil companies was to lever up or issue equity to fund acreage development, then turn around and sell the company or specific assets to a strategic buyer to pay down debt and cash out their investors. The playbook was similar for infrastructure sponsors, except they used the capital raised to fund new pipeline assets that they would drop down into MLP subsidiaries that would be brought public. They’d use the IPO proceeds, and any dividend payments from MLP shares they retained, to fund even more pipeline construction. It was financialization at its finest. Oil companies would then pay fixed rates on long-term contracts to the MLPs in order to have their crude or gas shipped around the country to refineries. This was all well and good until 2014, when the energy complex collapsed in on itself under the weight of debt and over-production.

This brings us to today (and to this Bloomberg piece). The MLP model still hasn’t recovered and I’m not positive it ever will. The big retail pitch for owning MLPs in a portfolio was that it was yield-generating energy exposure without the commodity risk (which was true, until it wasn’t). While the MLPs didn’t have direct commodity price exposure, they had indirect capital markets exposure, and that would be their death knell. Once oil producers started defaulting on their debt due to tanking commodity prices, the MLPs were shut out of debt and equity markets as well – a little guilt by association. Without access to fresh capital, the infrastructure sponsors were unable to fund new pipeline construction and sell the assets into their publicly-traded MLP subsidiaries. Now, with massive debt loads and capex commitments to unfinished pipeline projects, the infrastructure sponsors went into survival mode: cutting dividend payments, selling assets and operating strictly out of cash flow. That last part is important – operating out of cash flow meant using huge chunks of FCF to service debt instead of building pipelines, which is why the Permian is in the odd position of having inaccessible, near-worthless gas assets. That oil and gas isn’t worth shit without the infrastructure needed to sell it into markets, no matter how prolific your acreage is.

What a conundrum. All this PE capital flooded into the Permian in 2016 looking for bargain basement acreage deals – and they got them. Now that the PE firms are all there drilling, there is too much production coming online and too little pipeline to ship the stuff. This is ironic because oil and gas acreage assets are valued by what’s in the ground, not by what comes out and makes it to market. The new problem that will (inevitably) come to the forefront is that PE firms never pay for these assets with 100% equity capital, rather they almost always issue debt or take on a revolver and collateralize it with the asset alongside some equity to fuel the drilling capex. That leads me to wonder, if pipelines aren’t built quickly enough for these PE-sponsored DrillCos to ship and sell product, will funds run into cash flow issues and be forced to start liquidating at a loss or, even worse, engage their lenders for a little restructuring? Should either of those scenarios play out, it would have a ripple effect on acreage prices throughout the Lower 48, likely kicking off a deja vu of late 2014. Round and round we go.

Noted Space Cadet and Flamethrower Manufacturer Taking on the Haters

“Bloomberg – Tesla Urges Workers to Prove the ‘Haters’ Wrong and Ramp Up Production“

When he’s not bailing out one of his ventures at the expense of another or selling flamethrowers, Elon Musk is taking on the Tesla haters. There certainly are a lot of them these days, especially with capacity constraints and exploding cars impacting not just Model 3 deliveries, but the company’s cap structure as well. Tesla’s 5.3% 2025 paper has gotten crushed over the last week or so, currently trading at ~7.6%. The volatility, combined with the market’s weariness of Tesla delivery targets, has resulted in, you guessed it: a credit downgrade from Moody’s to B3 (S&P likely on deck).

Listen I love Elon. The guy toes the line between genius and lunatic better than anybody out there. Sometimes he builds PayPal, sometimes he build a rocketship and launches one of his overpriced cars into orbit. You never know what you’re gonna get, and that’s the kind of leadership I can get behind (not with my money, though).

That said – the company is certainly in the crosshairs of every shortbook on the planet. No doubt they’ll need to access markets to fund production targets at some point this year. Whether they choose equity or debt is yet to be seen, but they’ll both be relatively expensive. I’m rooting for the guy, but I’m more so getting my popcorn ready and rooting for the ride ahead. What a shitstorm of a bankruptcy that would be.

 

If You Thought the Bob Diamond Era Was Over at Barclays, You Were Wrong (Until This Morning)

“Bloomberg – Barclays Plc agreed to pay $2 billion in civil penalties to settle a U.S. investigation into its marketing of residential mortgage-backed securities between 2005 and 2007.”

The gift that keeps on giving: the 2008 financial crisis. While nobody wants to pony up $2B for alleged misdeeds, the news is actually great for Barclays as this settlement resolves all of their outstanding DoJ suits. They also nabbed two MDs for $2M to drop charges against them as well.

That said, can we talk about financial crisis litigation for a second? If you ever wanted to know how long it would take for armies of corporate lawyers and the U.S. gov’t to settle dozens of lawsuits over billions of dollars worth of securitizations, the answer is: no idea. We’re ten years removed from the crisis and still hammering out the details on settlements (no admission of guilt, of course!), and I’m sure there are more to come. I did find this little piece on Reuters referencing a BCG whitepaper where they estimate that global banks have paid $321B in penalties since the crisis (so more like $323B after this latest Barclays donation). That is just a shitload of money that I’m sure was put to great use by governments around the world.

Anyway – let’s all get a slow clap going for Barclays as they wrap up the North American leg of their financial crisis litigation tour. Best of luck to Bob Diamond as well, pretty sure he’s been relegated to conducting LBOs in Africa or something.

Overstock.com Realizes That Preparing for a Bitcoin Future Can Be Expensive in the Capital Markets Present

“CNBC – E-commerce company-turned-blockchain play Overstock.com‘s 4 million share offering has been canceled, according to a source familiar with the situation. Underwriter Guggenheim Securities decided late Wednesday night not to proceed due to market conditions, the source said.”

Overstock.com decided to kill it’s 4M share offering late Wednesday evening, as it discovered that while great for business in 2017, trading in lockstep with bitcoin hasn’t quite worked out in 2018. Look, I can see where Overstock is coming from. There is something to be said about first mover advantages and all that, but there’s also that John Henry line from the movie Moneyball: “…the first guy through the wall — he always gets bloody. Always.”

I subscribe to that philosophy. Let someone else innovate and deal with the cash burn. Outsource your R&D to the idealist and improve upon their design (or if they blow up, snatch the remains and run with it). In Overstock’s case, their CEO, Patrick Byrne, is the idealist. He had grandiose visions of transforming his e-commerce platform into a cryptocurrency exchange overnight, so the markets treated it like one. The guy has turned his once stable, discount furniture company into a crypto proxy with the likes of Riot Blockchain and that iced tea company from Long Island. Make no mistake: other large e-commerce and social network platforms would love to develop their own dominant medium of exchange a la crypto, and they’re taking notes on how to avoid the same fate as Overstock in the process.

Always remember: issuing equity can get expensive, especially when you’re planning on generating future cash flows by making markets in pixie dust. My condolences to Overstock shareholders.

 

Leveraged Burnout: Welcome

After years of staring into the anachronous (yet oddly satisfying) abyss that is a Bloomberg terminal, “v-ing up the model” and sifting through more management presentations than Intralinks, I’ve decided my brain can use a good ol’ fashioned creative reboot. Enter: Leveraged Burnout; my own satirical takes on an industry that, while I hold it dearly to my heart, has almost completed its transformation into a parody of itself – financial services.

Truth is, I wouldn’t have to do this if Dealbreaker would get their heads out of their asses and put out some quality content. That said, as noted extortion victim and all around good guy Rick Pitino once said: “Bess Levin and Matt Levine are not walkin’ through that door.” So we’ll do it. Together. While covering topics that truly matter, like if 2018 is finally the year that Deutsche Bank or Bill Ackman remember how to turn a profit.

I’m not sure how this whole thing will play out (nor will I care until it generates some ad rev), but we’ll see what happens. Maybe it grows and some more writers come aboard, maybe I’m not actually funny or knowledgeable enough to keep an audience. All I know is, I’m excited.

P.S. – speaking of Deutsche Bank, it looks like one of the longest running memes on the internet found out it was long some Tesla paper.

’til next time.