Wednesday, November 4, 2020

Election; Bitcoin Is Back Trading Near Three-Year Highs; Billion Dollar Loser; Where Cruise Ships Are Sent to Die

By Whitney Tilson

1) Things are moving so quickly that by the time you read this, it may be out of date...

But as of 8 a.m. this morning, it looked somewhat likely that former Vice President Joe Biden would win a narrow victory over President Donald Trump, while Republicans would maintain their majority in the Senate.

A split government is the outcome many investors were hoping for, so this is likely good news for stocks.

The polling outfits that I relied on in making my assessments have egg on their faces this morning, as their errors were even greater than in 2016. Thus, I'm turning to the real-money betting sites like PredictIt and the U.K.'s Betfair, which have been far more accurate (more evidence for the wisdom of the crowds!).

Right now, both PredictIt and Betfair have Biden 80% likely to squeak out a narrow victory – you can check their latest forecasts here and here. (Note that on Betfair, you have to convert their numbers to percentages; Biden 1.25 and Trump 4.0 means Biden is 80% likely to win.)

To understand why Biden is the favorite, consider that he currently has 238 electoral votes (including Arizona), so he needs only 32 more to reach the 270 he needs for a win. Here are the opportunities he has to get there in states that have not yet been called (with each state's electoral votes and Biden's current odds of winning on PredictIt):

  • Wisconsin (10 votes, 94% likelihood)
  • Nevada (6 votes, 88% likelihood)
  • Michigan (16 votes, 92% likelihood)
  • Pennsylvania (20 votes, 61% likelihood)
  • Georgia (16 votes, 48% likelihood)
  • North Carolina (15 votes, 12% likelihood)

The key thing to understand here is that by winning Arizona, Biden no longer needs to win Pennsylvania. If he carries Nevada, Wisconsin, and Michigan, it would give him the exact number of electoral votes he needs to win.

Additionally, if he wins Georgia, that would offset losing either Michigan or both Nevada and Wisconsin.

I'll have plenty more commentary on the election and its implications for stocks in future e-mails.

2) Bitcoin is on fire, as this Wall Street Journal article notes: Bitcoin Is Back Trading Near Three-Year Highs. Excerpt:

While stocks, oil and gold prices careened last week, one asset set new highs for the year: bitcoin.

The price of the digital currency has surged about 90% in 2020 and traded as high as $13,848 on Tuesday, according to CoinDesk. That is the highest level since January 2018, when bitcoin was coming down from its record high of $19,783 set in the previous month.

Many investors agree the renewed surge of interest is tied to bitcoin's potential as a hedge against inflation.

Bitcoin's proponents have touted that prospect for years, mainly because the bitcoin network has a set limit on the number of units that can be created: 21 million. With the coronavirus pandemic wracking economies across the globe, governments and central banks have been forced to spend trillions to prop up their economies while sapping the purchasing power of their currencies. That has revived fear that inflation will ramp up in the coming years, and that fear is winning bitcoin new converts.

While I would never short bitcoin or any other cryptocurrency – since they have no cash flow or intrinsic value and could literally trade anywhere – I continue to believe that they're a techno-libertarian pump-and-dump scheme and thus recommend that most investors avoid them.

3) I just finished listening to the first of what I'm sure will be many books on WeWork: Billion Dollar Loser: The Epic Rise and Spectacular Fall of Adam Neumann and WeWork.

As bad as I suspected things were there, it turns out that they were much worse! Here's a good review in the New York Times: The Cautionary Tale of Adam Neumann and WeWork. Excerpt:

The smoothest pour of all at WeWork was the frothy utopian verbiage continually streaming from Neumann's mouth. This river of bombast, initially intoxicating to investors and employees alike but ultimately stale and rank to all, included numbers representing tired old concepts such as earnings and expenditures. Its chief concern, however, was the wonderful futuristic world of We...

To fully appreciate its twists and turns, the reader should understand, or be willing to study on the fly, the customs, manners and vocabulary of contemporary investment banking. The sure reward for this effort is utter horror, unless the reader is herself a banker, in which case profound embarrassment might be more appropriate.

The global pool of capital on which free-market societies float like inflatable rubber ducks is a virtually bottomless reservoir of folly, vanity, mania and caprice. The accounting standards that purport to measure it and regulate its tidal flows are as fluid and foamy as WeWork's tap kombucha.

What was Neumann's company worth in its grand heyday, when its employees numbered in the thousands, its holdings and offices spanned the globe, and a gong still hung in its leader's office? Ten billion dollars? Forty-five? Or was WeWork's value potentially – as Son and Neumann both foresaw at one point, before a disastrous, aborted I.P.O. curbed the madness – a nice round trillion? All of the above, and none. What can be reliably calculated, however, is the ransom paid to Neumann for turning over his ghost ship to new officers. A billion dollars.

I covered this company, which I called a "scam" and mockingly nicknamed "The Whee Company," in many e-mails last year, and made the following predictions in my September 19 e-mail:

  1. Whee never goes public.
  2. As the company tries to reduce its catastrophic $1.6 billion annual burn rate to survive, it ceases growth, lays off huge numbers of employees, and tries to sell assets.
  3. Existing investors, led by SoftBank, wanting to avoid a total wipeout, will throw good money after bad and invest $1 billion or $2 billion in a distressed round that values the company at $5 billion.
  4. As part of the capital raise, investors will demand that Neumann step down and throw him out.
  5. None of this makes any difference, and the company files for bankruptcy a year from now.

The first four came to pass, but I was wrong on No. 5 – in fact, just last week, current CEO Sandeep Mathrani predicted that the company will turn profitable next year and then revisit plans for an initial public offering ("IPO"): WeWork's New CEO Is Eyeing an IPO Again – After He Turns Profit.

Count me a skeptic... As Billion Dollar Loser lays out in painful detail, WeWork was more an insane cult of personality than a real company, and it signed horrific long-term leases – a problem that's hard to fix...

4) Here's a fascinating NYT article about one industry – scrapping old cruise ships – that has really benefited from the pandemic: Where Cruise Ships Are Sent to Die. Excerpt:

Along the meandering industrial peninsula of Aliaga on Turkey's Aegean coast, the contents of gutted vessels lay strewn on the dusty roadside, scattered among clusters of orange lifeboats that tower so high they obscure the dramatic scene unfolding in the shipyard below.

There, five mammoth cruise ships sit crammed into a muddied cove, as hundreds of workers chip away at their hulls and bows, exposing the intricate anatomies of the boats that once carried thousands of people around the world. Now, as the coronavirus pandemic continues to devastate the cruise industry, companies are downsizing their fleets and selling the ships for scrap.

"We've never seen anything like this," said Kamil Onal, chairman of the Ship Recyclers' Association of Turkey. "Before the pandemic we mainly dismantled cargo ships, but now this has become the fate for cruise ships after months of sitting idle without passengers."

Among the ships being recycled at Aliaga, are three Carnival cruise liners – Inspiration, Imagination and Fantasy, which had just been refurbished in 2019. The world's largest cruise company reported a loss of $2.9 billion in the quarter ending on Aug. 31 and announced that it would remove 13 of its older, less efficient ships from its global fleet...

A cacophony of screeching metal, banging and clunking engulfs the shipyard as the ships are ripped apart deck by deck, with stateroom walls torn away and the amenities – gyms, theaters, discos – broken into pieces and carted away.

Nearly 2,000 workers have been employed to strip the five cruise ships of machinery, electronic equipment, glass, wood and other materials that can be reused or repurposed.

"Everything is taken out piece by piece, from the light bulb to the piano and swimming pool to the golf course," said Mr. Onal, looking out his office window at a group of workers cutting metal scraps from the ships. "It's a momentous task that will take up to eight months for each ship and they will continue until there is nothing left."

Best regards,