Great news for Lumber Liquidators; Wirecard critics targeted in London spy operation; How a Strong Job Market Has Proved the Experts Wrong; Finland Is a Capitalist Paradise

By Whitney Tilson

Thursday, December 12, 2019
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1) In my November 15 e-mail, I wrote:

One of my favorite stocks, Lumber Liquidators (LL) has an attractive and profitable unit-level store model, but has endured a dismal streak of bad luck, which is why the stock is so depressed (in fact, it’s at exactly the level is was when it went public 12 years ago, despite having four times the number of stores).

But maybe its luck is finally starting to turn… Just two weeks ago, the Office of the U.S. Trade Representative temporarily lifted tariffs – retroactive to September – on a big category of Lumber Liquidators’ products imported from China, luxury vinyl tile (“LVT”) flooring. According to a Piper Jaffray report out this morning…

The removal of tariffs on these categories is meaningful as (1) Tariffs have been quite disruptive to the Flooring industry due to heavy List 3 exposure (with tariffs at 25%); and (2) LVT and other engineered products have been the primary driver to industry growth in recent years. Our calculations suggest both FND and LL can each receive $10M-$12M in retroactive tariff refunds. And both should see improved pricing and margin profiles for both Q4 and 2020.

This is a big deal for a company that’s really struggling. To put just the $10 million to $12 million tariff refund into perspective, it would turn year-to-date losses of $6.7 million into a healthy profit.

Sure enough, this morning Lumber Liquidators announced a big tariff refund – and it’s more than double my estimate:

The Company currently expects to recover the relevant 301 tariff payments related to more than 100 stock keeping units that are now exempt under the USTR ruling (“Relevant Products”). As a result, the Company will recognize approximately $11 million as operating income in the fourth quarter of 2019 related to recoveries associated with Relevant Products already sold, net of certain other associated costs. The Company will also reduce the carrying cost of inventory by approximately $12 million related to Relevant Products held for sale. The Company will establish a receivable from U.S. Customs related to the anticipated recoveries of approximately $25 million and expects to receive payment by the end of the second quarter of 2020.

2) Kudos to the Financial Times for its ongoing courageous reporting on German payments giant Wirecard (WDI.DE), which many smart short sellers I know think is a house of cards. Here’s the latest (if you think Wirecard didn’t know all about this surveillance operation that targeted short sellers, please contact me, as I have a bridge to sell you…): Wirecard critics targeted in London spy operation. Excerpt:

A former Libyan intelligence chief, who told associates he is a shareholder in German payments-group Wirecard, funded a surveillance operation in London that targeted a string of investors including hedge fund manager Crispin Odey.

Rami El Obeidi, head of foreign intelligence in Libya’s National Transition Council, which governed the country temporarily in the wake of Muammar Gaddafi’s death in 2011, was hunting for evidence that market speculators were attempting to manipulate Wirecard shares, according to two people familiar with the operation.

He retained the services of two security companies: Sloane Risk Group in London, run by a former British counter-terrorism operative Hayley Elvins, and APG Protection, a Manchester-based firm run by a former special forces soldier Greg Raynor, according to a briefing document outlining the surveillance operation.

Sloane and APG then oversaw an operation codenamed “Palldium Phase 2”, using the services of 28 individual private investigators, the sources said. A surveillance team monitored at least eight men in total, according to the briefing document and photographs dated between October 23 and November 3 this year, which were obtained by the Financial Times.

Wirecard has denied any involvement in such surveillance. The Munich-based technology group, a member of the prestigious Dax 30 index of Germany’s largest companies, has long portrayed critics of its accounts and governance as criminals trying to manipulate its share price, in collusion with the media.

3) Here’s an interesting New York Times article on the recent U.S. employment numbers: How a Strong Job Market Has Proved the Experts Wrong. Excerpt:

There are a lot of good things to say, and few bad things to say, about the November employment numbers that were published Friday morning…

There is a bigger lesson contained in the data, one that is important beyond any one month’s tally of the job numbers: that the American economy is capable of cranking at a higher level than conventional wisdom held as recently as a few years ago. As the economy continues to grow well above what once seemed like its potential, without inflation or other clear signs of overheating, it’s clearer that the old view of its potential was an extremely costly mistake…

If we knew then what we know now, it would have had big implications for what seemed like sensible policy. The United States probably didn’t need to reduce budget deficits the way it did between 2013 and 2016, now that we know how much untapped growth potential there was. The Fed probably didn’t need to raise rates as quickly or as much as it did.

There are clear signs that Fed leaders are starting to internalize these lessons, and are now more open-minded to letting the economy run and seeing just how many people can be put to work and how much wages can rise before it causes inflation or other problems.

And markets seem to be getting that message…

4) Finland is the only Nordic country I’ve never visited, but I’m going to have to change that… I’ve heard it’s beautiful. Maybe my wife and I will do this five-day cruise from Helsinki to St. Petersburg and Tallinn.

Also, I’d like to see what the authors of this New York Times op-ed are talking about: Finland Is a Capitalist Paradise. It really challenged some of my assumptions, which is always healthy. Excerpt:

Finland, of course, is one of those Nordic countries that we hear some Americans, including President Trump, describe as unsustainable and oppressive – “socialist nanny states.” As we considered settling there, we canvassed Trevor’s family – he was raised in Arlington, Va. – and our American friends. They didn’t seem to think we’d be moving to a Soviet-style autocracy. In fact, many of them encouraged us to go. Even a venture capitalist we knew in Silicon Valley who has three children sounded envious: “I’d move to Finland in a heartbeat.”

So we went.

We’ve now been living in Finland for more than a year. The difference between our lives here and in the States has been tremendous, but perhaps not in the way many Americans might imagine. What we’ve experienced is an increase in personal freedom. Our lives are just much more manageable…

This year, the World Happiness Report also announced Finland to be the happiest country on earth, for the second year in a row.

But surely, many in the United States will conclude, Finnish citizens and businesses must be paying a steep price in lost freedoms, opportunity and wealth. Yes, Finland faces its own economic challenges, and Finns are notorious complainers whenever anything goes wrong. But under its current system, Finland has become one of the world’s wealthiest societies, and like the other Nordic countries, it is home to many hugely successful global companies.

In fact, a recent report by the chairman of market and investment strategy for JPMorgan Asset Management came to a surprising conclusion: The Nordic region is not only “just as business-friendly as the U.S.” but also better on key free-market indexes, including greater protection of private property, less impact on competition from government controls and more openness to trade and capital flows. According to the World Bank, doing business in Denmark and Norway is actually easier overall than it is in the United States.

Finland also has high levels of economic mobility across generations. A 2018 World Bank report revealed that children in Finland have a much better chance of escaping the economic class of their parents and pursuing their own success than do children in the United States.

Finally, and perhaps most shockingly, the nonpartisan watchdog group Freedom House has determined that citizens of Finland actually enjoy higher levels of personal and political freedom, and more secure political rights, than citizens of the United States.

What to make of all this? For starters, politicians in the United States might want to think twice about calling the Nordics “socialist.” From our perch, the term seems to have more currency on the other side of the Atlantic than it does here.

One of my readers commented, however:

Finland is lovely and impressive – but a few reminders:

  • It has a tiny population of 5.5 million, far less than New York City (8.6 million);
  • Fewer than 10% are of foreign origin or birth; and
  • It’s culturally homogenous – in essence, a single community. Everyone who moves to Finland adapts to local Finnish culture (although there have been some issues in recent years). 

Much of our discussion in multiethnic countries (of which the U.S. is the largest) is about how people of varying beliefs, values, and practices assimilate. It impacts businesses, social and political attitudes, expectations, and policies.

This article misses the huge cultural and demographic differences. It’s a bit like someone moving from NYC or LA to a small town in the Midwest and talking about how much more friendly, slower-paced, and community-oriented the small town is. Yes, that’s true, but is the comparison relevant?

Best regards,

Whitney

Whitney Tilson

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About Whitney Tilson

Prior to creating Empire Financial Research, Whitney Tilson founded and ran Kase Capital Management, which managed three value-oriented hedge funds and two mutual funds. Starting out of his bedroom with only $1 million, Tilson grew assets under management to nearly $200 million.

Tilson graduated magna cum laude from Harvard College with a bachelor’s degree in government in 1989. After college, he helped Wendy Kopp launch Teach for America and then spent two years as a consultant at the Boston Consulting Group. He earned his MBA from Harvard Business School in 1994, where he graduated in the top 5% of his class and was named a Baker Scholar.

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