Thursday, April 8, 2021

Jamie Dimon's annual letter; Avoid this stinker: ARK Space Exploration ETF; Short reports on EBON, RIDE, NKLA, DOX and NNDM; A Hacker Got All My Texts for $16

By Whitney Tilson

1) In yesterday's e-mail, I wrote about the basket of six bank stocks I bought last March. I haven't sold a share of any of them (despite my investing hero, Warren Buffett, dumping most of his financial stocks last year).

This has paid off, as they're up an average of 81% versus 61% for the S&P 500 Index.

One of my favorites is JPMorgan Chase (JPM), in large part because of its legendary CEO Jamie Dimon – he's known for his thoughtful, in-depth annual letters.

He released his latest one yesterday – the longest ever, at 66 pages – which you can read here. I enjoyed it and found that he shares my views on many things, such as the coming economic boom. Excerpts:

  • "I have little doubt that with excess savings, new stimulus savings, huge deficit spending, more QE, a new potential infrastructure bill, a successful vaccine and euphoria around the end of the pandemic, the U.S. economy will likely boom. This boom could easily run into 2023 because all the spending could extend well into 2023. The permanent effect of this boom will be fully known only when we see the quality, effectiveness and sustainability of the infrastructure and other government investments. I hope there is extraordinary discipline on how all of this money is spent. Spent wisely, it will create more economic opportunity for everyone."
  • "While equity valuations are quite high (by almost all measures, except against interest rates), historically, a multi-year booming economy could justify their current price. Equity markets look ahead, and they may very well be pricing in not only a booming economy but also the technical factor that lots of the excess liquidity will find its way into stocks. Clearly, there is some froth and speculation in parts of the market, which no one should find surprising. As Captain Louis Renault said in Casablanca, 'I'm shocked, shocked to find that gambling is going on in here!'"
  • "We don't know what the future holds, and it is possible that we will have a Goldilocks moment – fast and sustained growth, inflation that moves up gently (but not too much) and interest rates that rise (but not too much). A booming economy makes managing U.S. debt much easier and makes it much easier for the Fed to reverse QE and begin raising rates – because doing so may cause a little market turmoil, but it will not stop a roaring economy."
  • "China's leaders believe that America is in decline. They believe this not only because their country's sheer size will make them the largest economy on the planet by 2030 but also because they believe their long-term thinking and competent, consistent leadership have outshone America's in so many ways. The Chinese see an America that is losing ground in technology, infrastructure and education – a nation torn and crippled by politics, as well as racial and income inequality – and a country unable to coordinate government policies (fiscal, monetary, industrial, regulatory) in any coherent way to accomplish national goals. Unfortunately, recently, there is a lot of truth to this."
  • "Today, the United States and other countries around the world are grappling with many other critical issues. To name just a few: capitalism versus other economic systems; access to healthcare; immigration policy; the role of business in our society; and how, or even whether, the United States intends to exercise global leadership. Many Americans have lost faith in their government's ability to solve these and other problems – in fact, most people would describe government as ineffective, bureaucratic and often biased. Almost all institutions – governments, schools, media and businesses – have lost credibility in the eyes of the public. And perhaps for good reason: Many of our problems have been around for a long time and are not aging well. Politics is increasingly divisive, and government is increasingly dysfunctional, leading to a number of policies that simply don't work.

"Americans know that something has gone terribly wrong, and they blame this country's leadership: the elite, the powerful, the decision makers – in government, in business and in civic society. This is completely appropriate, for who else should take the blame? And people are right to be angry and feel let down. Our failures fuel the populism on both the political left and right. But populism is not policy, and we cannot let it drive another round of poor planning and bad leadership that will simply make our country's situation worse."

For more commentary on Dimon's letter, see:

2) In last Thursday's e-mail, I described Cathie Wood's ARK Space Exploration & Innovation Fund (ARKX) as "yet another sign of speculation and foolishness in the markets," noting that "Wood has filled it with stocks that have nothing to do with space."

This article in yesterday's WSJ confirms this: Cathie Wood Extends Hot Streak With ARK Space Exploration ETF. Excerpt:

Not everyone is a fan of the fund's makeup. Some took to social media, creating memes to mock ARK's decision to include Deere (DE) and other companies that appear to have no significant ties to the fund's theme of investing in space exploration and innovation. One showed a Deere tractor roving across a Mars landscape, another on the moon.

Deere, for its part, responded with several of its own memes, including one showing a UFO beaming up a tractor. Some analysts said the inclusion of Deere is less of a stretch when considering that the company makes satellite-guided machinery.

Other stocks included in the fund that seem at odds with its mandate include ARK's passively managed 3D-printing ETF and shares of Netflix (NFLX) and Amazon (AMZN).

Here's another funny meme a friend sent me: "The Evolution of Space Flight by Cathie Wood and ARK."

Another friend commented:

The largest holding in ARKX is Trimble (TRMB), which is involved in 3D printing. The second largest is The 3D Printing ETF (PRNT), which owns a ton of TRMB. (ARKX's holdings are detailed here.)

The last few days, the other ARK Invest funds have been ~20% of the volume of TRMB. A suspicious mind might think they were trying to pump up ARKX's net asst value through buying of TRMB in materially larger ETFs they control...

My advice: Stay far, far away from this stinker!

3) Speaking of stocks to avoid, activist short sellers have recently released compelling reports on various companies. Here are a few that caught my eye:

Nano Dimension (Nasdaq: NNDM – $2.14 billion), an Israeli 3D printing company, has risen over 1,000% on optimism that its DragonFly printer can be used to make electronic circuit boards. Nano Dimension's current CEO has been previously accused, but never convicted, of an "extortion attempt" and the company's former Chairman was arrested on charges of money laundering, aggravated fraud, and securities violations. Nano Dimension's history includes consistent unprofitability, serious dilution, an OTC to Nasdaq uplisting, a 50 for 1 reverse split, and 253 press releases.

Nano Dimension lacks the economic substance of many other multi-billion companies. Its revenue in 2020 totaled $3.4 million, less than half its $7.1 million in revenue during 2019. In its 10-K for the year ended 2020, Nano Dimension disclosed having 87 full-time employees, down from the 91 people it employed in 2018. Over the last five years, the company has spent approximately $42 million in R&D and earned $17 million in total revenue. Nonetheless, the company touts deals with "defense contractors" and sells investors on the potential of its 3D printers.

Shares outstanding have gone from about 1 million in 2017 to over 80 million in December 2020.

4) Jeers to the telecom companies that allow our text messages to be hacked so easily: A Hacker Got All My Texts for $16. Excerpt:

This overlooked attack vector shows not only how unregulated commercial SMS tools are but also how there are gaping holes in our telecommunications infrastructure, with a hacker sometimes just having to pinky swear they have the consent of the target.

"Welcome to create an account if you want to mess with it, literally anyone can sign up," Lucky225, the pseudonymous hacker who carried out the attack, told Motherboard, describing how easy it is to gain access to the tools necessary to seize phone numbers.

Fortunately, Lucky225 was taking over my number and breaking into the connected accounts with my permission to demonstrate the flaw. This also doesn't rely on SS7 exploitation, where more sophisticated attackers tap into the telecom industry's backbone to intercept messages on the fly. What Lucky225 did with Sakari is easier to pull off and requires less technical skill or knowledge. Unlike SIM jacking, where a victim loses cell service entirely, my phone seemed normal. Except I never received the messages intended for me, but he did.

Once the hacker is able to reroute a target's text messages, it can then be trivial to hack into other accounts associated with that phone number. In this case, the hacker sent login requests to Bumble, WhatsApp, and Postmates, and easily accessed the accounts.

"I used a prepaid card to buy their $16 per month plan and then after that was done it let me steal numbers just by filling out LOA info with fake info," Lucky225 added, referring to a Letter of Authorization, a document saying that the signer has authority to switch telephone numbers. (Cyber security company Okey Systems, where Lucky225 is Director of Information, has released a tool that companies and consumers can use to detect this attack and other types of phone number takeovers.)

The method of attack, which has not been previously reported or demonstrated in detail, has implications for cybercrime, where criminals often take over target's phone numbers in order to harass them, drain their bank account, or otherwise tear through their digital lives. The attack also brings up issues around private, corporate, and national security, where once a hacker gains a foothold on a victim's phone number, they may be able to intercept sensitive information or personal secrets.

"It's not hard to see the enormous threat to safety and security this kind of attack poses. The FCC must use its authority to force phone companies to secure their networks from hackers. Former Chairman Pai's approach of industry self-regulation clearly failed," Senator Ron Wyden said in a statement after Motherboard explained the contours of the attack.

Best regards,


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Empire Financial Research

Whitney Tilson

Empire Financial Research founder and CEO Whitney Tilson is the editor of the Empire Investment Report, a monthly investment advisory that focuses on cheap, high-quality stock ideas.

Whitney graduated with honors from Harvard University and Harvard Business School, where he earned an MBA and was named a Baker Scholar. Whitney spent nearly 20 years on Wall Street, during which time he founded and ran Kase Capital Management, growing assets under management from $1 million at inception to a peak of $200 million.

Once dubbed "The Prophet" by CNBC, Whitney predicted the dot-com crash, the housing bust, the 2009 stock bottom, and more. Now, he's sharing his secrets and strategies with followers of his latest endeavor, Empire Financial Research.

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