Author: davidajepson

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When will the GameStop?

Is GameStop a tale about the democratisation of financial markets? Is it a punch in the face for the Goliath hedge funds which prey on weak companies. It may certainly have cost them a lot of money. However has it challenged anything fundamental.

GameStop is a very large chain of video game shops. According to the latest accounts I could find on line the company has 3,642 stores in the US and 1,867 stores elsewhere around the world. Its stores are all leased and in 2019 around 70% of these leases were due to expire in the next two years.

In June 2019 the Board elected to eliminate their quarterly dividends with immediate effect. A helpful graph of their stock’s value shows it halving in the period from January 2015 to January 2019. All of this probably reflects the fact that the net sales of the business fell from $9bn in 2015 to $6.4bn in 2019. This meant that a net income of $379m became a net loss of -$464m. Stock holders equity held on the balance sheet halved in the twelve months from 2 February 2019 to 1 February 2020.

I am not a financial advisor and adopt a very timid attitude to anything beyond a normal bank account. There may be financial wizards who can see value in the accounts of GameStop that I am missing. But, were I to come into a small inheritance and felt like playing the market this is not the first stock I would chose.

Not only do all those numbers look consistently bad but this was all before the impact of CovEcon-19. Further, my limited understanding of the software games market (two sons) makes me think that their acquisition of such things is, if not directly over the internet, then via an Amazon van over the internet, rarely, ie. never from a game store.

I have argued elsewhere that I can see very little value in short selling. I can, however, see when a short selling bet looks like it will be in the money. OK, lots of day traders have been able to change this in the case of GameStop. They have inflicted some pain on the hedge funds. But, given the very likely state of the global economy post CovEcon-19, short selling bets will not be in short supply.

Are there enough day traders out there to defend all the companies subject to attack? And it is interesting that enthusiasts have rallied around to pump the shares of a multi billion dollar company which pays its staff, of mainly games enthusiasts, $8 per hour.

The day traders cannot defy gravity for ever. Eventually the underlying fundamentals of the business will assert themselves and the stock will collapse. For many this has been an interesting spectator sport with lots of different takes on the pros, cons, morals and mysteries of the process.

However it is right that the authorities wish to review this whole phenomenon. It has thrown up all kinds of questions about the operation of the market and particularly how access can be differentially controlled to the benefit of the hedge funds. But a close review of the transactions should take place to see who might have benefitted from this organised movement of the market.

I fear a whole lot of day traders will lose out to a few savvy investors. At the moment the stock is trading at about $50 per share. This is way below the $347 at the end of January. However, it is $46 more than it was trading this time last year.

The music is slowing, when it stops you don’t want to be the last person holding the bits of paper. I guess a lot more savings are going to change hands over the next few days and, sadly, I suspect it will not be in the direction of greater wealth equality.

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Is Oil Being Removed from the Wheels of Change?

For the past 40 years the oil industry has been engaged in what the tobacco industry had been engaged in before it. The manufacture of doubt.

Eventually, the scientific evidence overwhelmed the spurious arguments and pseudo science generously sponsored by tobacco companies. They quietly refocussed in parts of the world where less informed consumers could continue to provide them profits through their deaths.

Doubt for the oil industry, however, was, in many ways, an easier sell. Firstly, the link between harm and product was less tangible. People using an enormous amount of oil did not die from using it. Second, the damage it did was to one of the most complex systems in the world, climate, so demonstrating the link was open to far more challenge. Third, the essential benefits of using it were manifest, not least in the internal combustion engine and the freedom it provided.

In addition to this the scale of the industry was and remains daunting. The world uses approximately 100m barrels of oil per day. The current price of oil is around $50 per barrel. This means oil sales every day are worth about $5bn, or $1.8trn per annum. This compares to the the roughly $800bn per annum for the tobacco industry.

All this means there are enormous levels of vested interest in oil production and comparable levels of resource to be applied to defend it. The application of the interest and resource to political influencing has been documented by many.

Jane Meyer notably charts the relationship between the “Dark Money” of oil wealth and direct political lobbying, and the more insidious funding of law makers supportive of the industry with enormous campaign donations via the Political Action Committee (PAC) system in the United States.

In America both Democrats and Republicans were targets of the oil industry but it certainly found a more welcome and eager advocate in the GOP. The logical conclusion of which was a president who was a climate change denier, withdrew from the Paris Climate Accord, downgraded the Environmental Protection Agency and opened federal lands to carbon fuel explorations.

However, the growing traction of public concern is starting to impact the oil industry and other fossil fuel companies. It is now clear major changes needed, like the adoption of electric cars, are beginning to become real.

Uncertainty is the greatest fear of all major industries as has been made clear by the Brexit debacle in the UK where most businesses got to the point where they did not care whether we were “in” or “out” as long as it was clearly one thing or the other.

This craving for certainty partly explains the support for Joe Biden’s clear statements about climate change and the inevitable consequences for the motor industry from the industry itself. When they know there is a date for the abandonment of the internal combustion engine they can develop a strategy to achieve this. For all businesses, once the writing is on the wall, the job of the CEO is to read it.

Similarly, savvy investors can hear the change in the music and are starting to evaluate their strategies accordingly. Stranded assets, like oil that cannot be extracted if we are to avoid run away global warming, flash red light risk. What are the oil companies doing about it? How credible are the strategies?

Black Rock, one of the world’s largest asset manager’s with some $8.6trn of assets in management, has made clear it sees climate change as “investment risk”. Its Chairman and CEO Larry Fink states future investment decisions will be guided by how those seeking cash can demonstrate their business models are compatible with net zero emissions by 2050.

Much as the response of Boris Johnson to the pandemic has come to be seen as belated and lacking urgency at a critical time, so also, in the future, the response of the fossil fuel industry may come to be seen in a similar light. The timescales may be different, 12 months and 30 years, however so is the scale of change needed.

According to Bill McKibben’s book “Falter”, it was the oil industry itself which first identified burning fossil fuels as leading to changes in global climate back in 1977. After a brief period of transparency and cooperation, vested interest determined a revised approach of secrecy and “doubt manufacture” which has lasted for the best part of 40 years.

However, as scientific evidence piles up, real world weather starts to illustrate climate challenge and impacted populations begin to campaign the industry can see the “manufacturing of doubt” strategy has run its course. Having flipped once on the reality of climate change and it is not inconceivable, in fact, it is highly likely, the industry will flip again. Indeed there are all sorts of signs the change is happening.

As it happens the industry will no longer wish to support politicians who are swimming against the tide of history and creating uncertainty. They will want to develop new strategies within a clear national policy framework. Instead of impeding change to net zero they may well become powerful advocates for it. Ironically, this may be a rare case where oil lubricates a process more by its absence than its presence.

All of this adds to the current woes of the GOP in the United States. If the above has any relation to reality their wagon is firmly hitched to the wrong team. The “Dark Money” which has been flowing into their coffers may start to dry up as the wells are capped. What is more this may happen much quicker than they anticipate. We can live in hope!

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Will Donald J Trump be Found Guilty?

Well, of something, the answer is almost certainly yes. However, if we confine ourselves to the question of his second impeachment, and whether the Senate will find him guilty, that is far from certain.

It is pretty clear the Republican leadership would give a great deal to be rid of ex-President Trump. He has shifted the strategy of the party to focus on a nationalist, nativist, and white supremacist base that may be difficult to transform into a reliable majority vote even with the various Republican biases of the existing system. In the immediate aftermath of 6 January sentiment was running high and a strong impetus toward impeachment ran through both parties.

As time has gone by, however, a very loud cohort of the Trump base have started threatening to “primary”, if not hang, anyone who fails to support the ex-president 100%. Mitch McConnell quickly jumped back into line as some of the more extreme Republican members of the House and Senate started to compete to outshine others in their loyalty to “Trumpism”. People like Ted Cruz, Marco Rubio and Josh Hawley, all seem to have their eyes set on 2024 and the 74m Trump voters they think will propel them to personal victory.

From a position of some optimism after 6 January, the brave talk of some Republican Congress men and women started to evaporate and conviction looked less and less likely.

However, this week there has been some great news. The ex-president is taking control of his own defence. The benefits of this were immediately apparent when Trump fired the lead of his legal team, a conservative and highly competent defence attorney called Butch Bowers. This resulted in a number of other lawyers in the team leaving, fired or resigned not clear.

Being fired by Trump as a lawyer is probably seen as a mixed blessing as you will not have to work with someone who is certain they know the law better than you and almost as certain is going to cut you on the fees. He is the kind of client you want a weekly fee payment with, if not daily.

Apparently, the Republican leadership are trying to convince the ex-president the strategy for impeachment should simply be that it is unconstitutional with him having left office. Trump, however, wants to rehash his bogus claims about a robbed election. The latter would certainly up the odds of him being convicted and the only thing that could make it certain is if he agreed to be a witness in his in own defence. If there was ever a need to claim the 5th Amendment, however, this would be it.

My heart would like a guilty verdict but my head thinks the republicans are still fixated on the Trump base which they think is transferable and manageable. I suspect they are wrong on both counts.

If I were one of the sensible Republican Senators I would condemn the whole trial as a sham and refuse to attend on the grounds that it would provide a spurious legitimacy to the whole business.

Obviously, I would be disappointed in the result if enough of my colleagues thought the same and thereby opened the way to a two thirds majority of those in attendance finding the ex-president guilty. Further, I would rail on Fox news about the outrageous injustice of the subsequent decision to ban Mr Trump from ever holding office again.

I would then go home and breathe an enormous sigh of relief before I got on with the job or trying to rebuild a credible Republican party committed to democratic values.

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The Trials of Tyranny

President Putin is having a difficult time at the moment. Now that former president Trump has left office Putin has moved into the number one spot of most pressing threat to liberal democracies albeit probably not the long term greatest.

His arrest of the man he tried to have assassinated, Alexi Navalny, on his return to Russia has not gone well. First, tens of thousands of Russians in cities across the enormous country turned out in freezing weather to protest leading to some 5k arrests.

You can understand why President Putin does not see eye to eye with Mr Navalny given the latter’s remorseless focus on the former’s corruption. The YouTube video recounting some of the President’s early career and the development of Putin Palace has been downloaded by 6m+ people but has also been accessed via a range of other sites.

The video is the best part of two hours long and narrated at breakneck speed by Mr Navalny. Some will no doubt suggest this is simply an opposition politician trying to besmirch his opponent. However, much of the information about the President’s early career with the Stassi in Dresden, the Mayors office in St Petersburg and the Yeltsin government in Moscow ties closely with that provided by others notably Cathrine Belton’s excellent book “Putin’s People: How the KGB Took Back Russia and then Took on the West.”

Of course the Russian leaders duplicity is not something lacking evidence. His explicit rejection of any suggestion that his countries troops were in the Crimean peninsula until he annexed it in 2014. His denial of any involvement in the deaths of a number of people all of whom were opponents and critics, specifically threatened by the president before they were killed. Then of course there were the attempted assassinations of Sergei and Yulia Skripal and Mr Navalny with the use of weapon grade Novichok nerve agent. None of which he knew anything about.

If all those protests a were not enough, he then has a phone conversation with the new President of the United States. This time the content of the call was made public by the White House and not the Kremlin in a break with recent tradition. Also the tone seems to have been somewhat different. It was not a cosy chat about the many things Russia and the US have in common!

President Biden raised a number of awkward matters. Notably the ongoing cyber attack on the US, Russias’s actions in the Ukraine, its attempts to interfere in the 2016 and 2020 elections and specifically the attempt to assassinate Mr Navalny, and his arrest on his return to Moscow. Further, president Biden did not come off the call to announce that he had been reassured by president Putin that all these things were not true, or grossly exaggerated by hostile press coverage and president Biden’s own misinformed National Intelligence agencies.

All of this must have made Putin long for happier times, before the November US election. Many would think that after twenty years being top tyrant and an increasingly hostile environment the attractions of retirement would start to grow in President Putin’s mind. Unfortunately, this is not so simple, even if he was tempted.

One of the biggest problems of being a tyrant is how you step down with out getting killed. As top tyrant you can only stay there by destroying or cowing all alternative centres of power, like a free press and independent judiciary. That is all ok when you can rely on people with guns doing as you tell them. The minute you cannot you are at the mercy of whoever is next top tyrant.

This creates something of a vicious circle. You are loath to stand down for the reason suggested above so you have to remain in power. But in order to remain top tyrant, you have to keep all aspiring top tyrants in fear of you. Over time this begins to rub more and more of them up the wrong way. You notice this and redouble your efforts to instil fear, and so on until…

There is no doubt President Putin is a shrewd operator and had built a veritable army of supporters who depend absolutely on his patronage. However, when the economy is performing terribly, and at the same time as wages and pensions are stagnant the states coffers are being pillaged to build Imperial Palaces tempers fray.

As a court decides the fate of Mr Navalny it is very likely that telephone justice will prevail and a call from the Kremlin will determine the views of the justices. But the Kremlin may be thinking very hard about what the call should say. Opposition is growing and it is difficult to know whether Mr Navalny is more of a threat outside and campaigning or inside and a continuing focus on Russian injustice. Sadly, I suspect president Putin will revert to his standard playbook and imprison his opponent.

However he should keep in mind that there is no rule says countries can only have one revolution.