Industrial

Supply Chains: Ditching China

Yet more evidence of global supply chains looking to diversify. The US Pentagon is investing in a processing plant with Aussie company Lynas to break China’s stronghold on rare earths.

Several months back the Japanese government put out a $2bn package to incentivize companies to pull production out of China back to Japan.

We have invested in a company called Jervois Mining (JRV) in Australia. JRV has a cobalt mine in Idaho. Cobalt is one of the core ingredients used in EV batteries. We think China’s current 80% global share in cobalt refining supply will be the next pin to fall. The investment in US-based domestic capacity is the logical next step. Seems like a no brainer.

NB this doesn’t constitute financial advice.

Mandatory message for all politicians

We need more of this. A message from South Dakota Governor Kristi Noem. It should be played in the halls or every government around the world until they get the message. After all they are only too happy to blast messages to us. So refreshing to hear politicians wanting to stay out of our way!

#BlackSkinMatters. J&J caves to the cancel culture mob

Now J&J is dumping hand whitening cream after social pressure surrounding racial inequality.

Perhaps sunscreen and tanning lotions should be banned by the company too? After all, those who want a darker complexion must be just as guilty of dermatological appropriation.

Or is J&J’s move really just a cynical attempt by the legal and PR departments to appear as a good corporate citizen amidst a criminal probe into whether the pharma giant lied to the public about the possible cancer risks of its talcum powder?

Also, did J&J ever think of the demand from similar products for coloured women?

Urban Rx deliberately targeted this space because of an absence of products tailored to their needs. Perhaps J&J should self-flagellate for not catering this area and apologize for racially insensitive product developers. Publicly sack them to appease the mob. Black Skin Matters.

Forbes says sales for UrbanRx are booming.

Urban Rx Founder Rachel Roff opened a spa in Charlotte, North Carolina 12 years ago and found that although 50% of the women in the south are African-American, Roff could not find products that provided adequate skin care for women with darker skin. Over time she developed a skincare technology she calls Cleartone Advanced Technology…Although she still operates the spa, that business is dwarfed by the skincare business, which continues to grow very rapidly.

See a need. Fill a need. We hope Roff continues to do well. After all, if coloured women care about removing blemishes surely they have exactly the same requirements as women of other skin tones. It isn’t racist. It is a choice.

Skin whitening products are extremely popular in Asian and Middle Eastern markets. Perhaps J&J should launch a targeted ad campaign shaming c.70% of the world’s female population for their dermatological privilege.

According to Grandview Research , the global skin lightening products market size was valued at US$ 8.3 billion in 2018 and a CAGR of 7.8%pa.

Didn’t J&J’s PR department study what happened to P&G when it targeted ‘toxic masculinity’ via the Gillette brand which wiped $8 billion in value?

From our perspective, J&J products are off our list. We never ask anyone to boycott companies but we are sick of being lectured to by sanctimonious businesses who want to morally preen.

These brands are totally within their rights to make commercial decisions about product lines.

However they don’t have an obligation to tell customers that their personal preferences with respect to hygiene, skincare or anything else are not in step with the times, especially in cultures that hold different views about beauty which are often centuries old.

Japanese skin whitening giants Shiseido and KOSÉ will be loving such corporate harakiri by J&J. J&J shareholders won’t.

Get woke, go broke.

Who Knew? 18.6% of Minneapolis real estate listings up for sale in last 7 days

Minnyap@

Do Americans really want Democrat policies at a national level? As the Minneapolis City Council voted to replace the Minneapolis Police Department with community-led public safety groups, reports are that 18.6% of Minneapolis’ total real estate listings have come up for sale in just 7 days. Real estate website Zillow has tested at 15%. As a rule, 5-6% of total properties is a general average for properties for sale at any one time. Minneapolis at 3x that. Who knew?

What did these politicians think when they were debating to disband the police? None of this cross their minds?

What is worse, the tax base will shrink with it further compounding the problems these political hacks think they will solve for with kumbaya hand-holding. Watch crime soar. Well done liberals. Just when we think new levels of stupidity are hit, you guys manage to lower the bar time after time.

Once again, how can sane Americans honestly see Democrats as a credible alternative to Trump, for all of his foibles?

You’ll never guess WHO supports the letter urging a green recovery

Criony

Thomas Sowell once said, Those who cry out that the government should ‘do something’ never even ask for data on what has actually happened when the government did something, compared to what actually happened when the government did nothing.

According to an open letter signed by 200 bodies representing 40,000,000 health workers The Guardian penned,

Chief medical officers and chief scientific advisers must be directly involved in designing the stimulus packages now underway, the letter urges, in order to ensure they include considerations of public health and environmental concerns. They say public health systems should be strengthened, and they warn of how environmental degradation could help to unleash future diseases.

Who knew?

What better way to cash in on a pandemic by claiming outrageously false representation of members in an attempt to secure funding grants. The irony of this pandemic is that it has exposed the very authorities – who we dare not question – as amateurs in the very fields they claim expertise.

Perhaps we should ask ourselves why the revenue growth of the RACGP far outstrips that of the AMA? Should the AMA question why its membership has fallen from 95% of doctors to around 26% as it has taken on the role of a climate and social justice activist rather than the RACGP’s approach to be an advocate for better health?

How many of the 40 million health professionals described above believe the orthodoxy? It is bogus to say all followers willingly endorse what these membership bodies make blanket claims about.

Perhaps we should indulge the medical and scientific communities’ request by benchmarking their supposedly superior predictive powers against their howlingly inaccurate models produced during the coronavirus which have undoubtedly done more harm to the economy than good. Take Australia. We were told 15 million may be infected and 150,000 could die. The result to date. Less than 7,200 and 100 deaths. So much for listening to the professionals.

If we are to listen to intellectually superior academia in these fields, should we just accept the Australian National University’s latest plan to have climate change listed on death certificates?

Taken to its logical conclusion, this is an ideology speaking, not science.

We have already had decades of research to support just how flawed climate science models have proven. None of the catastrophic claims of being engulfed by rising sea levels or having to tell our kids they’d never see the snow has happened. Even hardened environmental activist Michael Moore concedes the ridiculous extent to crony socialism behind the green movement.

In February we documented the story of the National Climate Emergency Summit held in Melbourne. The mainstream media led us to believe that the best of the best scientific minds congregated. We pointed out that the list of speakers was largely devoid of scientific experts. 40% were activists, 16% were from the media, 12% were politicians, 11% were academics, 4% high school students and 3% doctors. Biased much?

Yet we have seen this type of shallow content activism before, especially with respect to open letters.

We reported that 268 Australian academics cosigned an open letter supporting the climate activist group, Extinction Rebellion.

While the content was predictable, the statistics were anything but convincing. We noted,

Perhaps the most hilarious signatory to the letter was Matthew Flinders of Flinders University. Unless the university website has another Matthew Flinders listed as an active member, our esteemed explorer seems to have navigated his way back to life…simply adding to the total lack of credibility of the cabal of 268 academics who believe they have some sort of intellectual superiority over us. If one ever wanted proof of our judiciary leaning hard left, 12% of the people that signed this document were in law-related fields.

“…Many of the woke academia come from fields such as stand up comedy, poetry, arts/education, sports management, archaeology, LatAm studies, sex, health and society, social services, veterinary biology, culture, gender, racism…are you catching the drift of those supporting XR? Even Monash University’s Campus Operations Manager and Telephony Application Administrator signed it! Wonderful individuals but should we hold our educators to such high standards when anyone’s opinion will do?”

“…Eerily, over 90% of the signatories do not appear to be renowned experts in teaching science, much less climate science. Which means, why weren’t the scientists in these universities willing to commit their names to a cause that fits their ideology? Who needs them when one faculty member from Monash University deals with ‘Imaginative Education‘?…”

What has been happening in practice? Mexico has already announced that renewables subsidies are out. It has recognized that intermittent energy has no place in rebuilding the economy in a post-pandemic world. Alberta’s energy minister Sonya Savage said with respect to the Trans Mountain expansion project, “Now is a great time to be building a pipeline because you can’t have protests of more than 15 people…” Actions, not words. 

Which brings us back to the point of blindly submitting to expert opinion which is little more than brazen activism.

The World Medical Association (WMA), the International Council of Nurses (ICN), the Commonwealth Nurses and Midwives Federation, the World Organization of Family Doctors and the World Federation of Public Health Associations, as well as thousands of individual health professionals, have signed this letter. 40 million others have not.

The proof is in the pudding. If the WMA  believes what it signed so strongly, why isn’t it included in its press releases as we publish? Admittedly it has upped the statement on its Twitter page to the 12,900 followers, a microbe in comparison to its supposed flock of 10 million physicians it represents. The ICN – which claims to represent 20 million nurses made it all too clear as to why we should dismiss it entirely – the WHO supports and promotes the letter. One wonders whether experts from the Chinese Ministry of Propaganda helped in its drafting. Afterall, China would be the biggest beneficiary were governments to fall into line.

Bes sure to read the quotes from the experts here.

APRA priorities are frightening

We wrote a while back that the Australian Prudential Regulatory Authority (APRA) had taken its finger OFF the pulse when assessing the risks facing our financial institutions. That was before COVID19. We think our banks are heavily leveraged and have little equity to offset a collapse in the property bubble.

Despite being faced with the prospect of a property meltdown thanks to an employment destroying pandemic, APRA thinks hiring a “Head of Climate Risk” is the way forward.

Why does APRA bother pursuing a field it has no expertise in much less look to create new green tape to extend its oversight?

It is not alone. The Australian Securities & Investments Commission (ASIC) is now seeking more oversight on corporates reporting on climate change.

ASIC’s own study found that fewer and fewer companies were reporting on climate change over the past decade. Shouldn’t we take that as corporates having a better pulse on the impact that climate change will have on their industries than a bunch of bureaucrats wanting to legislate an ideology?

With the COVID19 driven seismic economic shifts to come, it is frightening to see our government departments pursuing irrelevant regulation that companies are even less concerned about.

APRA should be focused on ensuring the coming property market implosion doesn’t cripple our banks. Instead of using the time to fine tune a wide variety of scenarios and stress tests to combat the troubling future, it is only proving it should have power taken away not granted.

Parker surprises positively

Parker Hannifin, the global industrial hardware store for all the major metal bashers like Boeing and Caterpillar reported results this morning. In a word – impressive.

All we care about is the orders trend. Parker supplies to global top tier firms around the world in pneumatics, hydraulics, pumps, solenoids, valves, actuators, linear motion, factory automation controls and so on. Think of it as a Bunnings Warehouse for multinational industrial corporations. Parker’s order book is a great read across on the state of global industrial production.

Orders for the quarter ending March 31, 2020, compared with the same quarter a year ago were as follows:

· Orders decreased 2% for total Parker

· Orders decreased 7% in the Diversified Industrial North America businesses

· Orders decreased 2% in the Diversified Industrial International businesses

· Orders increased 12% in the Aerospace Systems Segment on a rolling 12-month average basis.

Given COVID19, that is a pretty strong result on orders. Having said that, the next quarter maybe slightly more challenging and the company has pulled 2020 guidance.

At first glance, this is a pretty good outcome. The shares have retraced 50% from the recent lows.

Harley’s horrible huffing contains plenty of puffing

HDQ1US

When companies won’t give guidance, we must find ways to see where we were relative to history to get a picture of the future. Harley-Davidson (HOG) makes a good case study. Coronavirus may be one factor but the company has already produced results that have undercut the worst levels experienced during the GFC. We have long criticised HOG for fuzzy maths under the disastrous leadership of the recently ousted CEO Matt Levatich.

While there are strictly no direct apples for apples comparisons on the timing of coronavirus and the GFC (the latter requiring no lockdown), we note the weakness in Q1 2020 unit sales in the chart above.

This is what the trend of Q2 looks like.

HDUSQ2

If we assumed a similar slowdown for April and May then theoretically the company would comfortably breach the Q2 2009 unit sales level of 58,179 which is only 18.6% below the Q2 2019 level. Q1 2020 global sales fell by 17.7%, even though the company made a very misleading statement which we’ll get to in a moment.

One thing that struck us was the steadily rising value of quarterly inventory as a percentage of quarterly non-finance revenues since Q1 2014. While the former value is a balance sheet item and the latter P&L, Q1 is generally a period where new models are rolled out ahead of the busiest Q2 & Q3 seasons to ensure the distribution network can move metal.

HDQ1Inv

Shipments reflect this. The inventory metric drops off into Q2 although exhibits a similar type of trend to Q1. Given Q2 2009 was the beginning of the tough times post-GFC, will we see the high watermark breached or will the slowdown in production offset it? How badly are revenues affected such even flat inventories lead to a deterioration of this measure?

In Q4 2019, inventories to motorcycle revenues surged to 69.1%.

We note that Q1 2020 shipments equated to an inventory of 12,534 units (+29.0%YoY).

HDq2Inv

Here is where it gets interesting. By HOG’s own admission in the quarterly investor presentation pack (p.7), it noted that Q1 2020 US retail sales were on target to be one of ‘the strongest quarters in the last 6 years through to mid-March‘, until COVID. 6 years ago US Q1 unit sales hit 35,730 units. US sales in Q1 2020 ended up at 23,732.

By deduction,

In Q1 2014, over 90 days HOG shifted on average 397 bikes per day. (35,730/90 = 397)

In Q1 2020, over the 74 days to mid-March, HOG was moving on average 321 bikes per day. (23,732/74 = 320.7027).

If we assumed that HOG was to hit that magic target over the 16 days stolen by COVID19, it would have had to punch out 750 bikes a day. (11,998/16 = 749.875).

We would love to see the order book for these magical beasts that were waiting for a home…it would seem the sales and marketing department cherry-picked one strong day and multiplied it over the quarter to create such a questionable statement.

Here is a chart of motorcycle related revenue for Q1 since 2008. No wonder the shares have underperformed since 2014, even with a small fortune squandered on share buybacks.

HSQ1rev

The Q2 revenue book doesn’t look too flash either if April is wiped out. At present 50% of dealers are shut since late March. Is the market prepared for a sub Q2 2009 print? The share price has rebounded strongly after the Q1 results even though there is no guidance to speak of.

HDq2Rev

But it gets worse. So poor has the Q3 season become for HOG that its unit sales have missed the Q3 2009 post-GFC low for seven out of the last 10 years. Are we to believe if the world is out of lockdown by Q3 that there will be a miraculous surge in new bike sales when unemployment is likely to remain at troubling levels potentially above that of GFC?

HDq3US

HOG is a great example of a divine franchise. It wasted far too much money on share buybacks (now suspended) and sits with a credit rating just two notches above junk.

The annualised Q1 2020 loss experience for the finance business sit at 10-year highs even before it has been thumped by the coming turndown. People buy HOGs as a hobby, not transport. A purely discretionary purchase. We imagine that restoring household balance sheets will take precedence to stumping up serious coin for a Harley cruiser.

Sadly Levatich and his 2027 vision have not been consigned to the dustbin of history which is the only logical filing cabinet for it. Completely unrealistic, devoid of reality and totally in denial of the shifting sands in the global motorbike market.

The new “Rewire Plan” (p.5) while sketchy on detail (as it would with an interim CEO) is a reheat of Levatich’s plan. Sad.

In our view, the entire motorcycle industry needs a strong HOG. New management is a good start but it won’t help if they intend to convince investors that they were on course to shoot Q1 to its best level in 6 years with questionable math. How quickly can inventory be pared? What models will revive its fortunes?

HOG needs to get in touch with its core customer base the way Willie Davidson did after the dark days of AMF ownership. It needs to build products which hark back to its former glory rather answer questions in segments that no one is asking it to fill.

Indian, its rival of 100 years ago is killing it with the FTR1200. Indian’s parent company, Polaris Industries, posted a small single-digit increase for motorcycles in Q1 2020. Enough excuses HOG. You are running out of time and your retained earnings are 1/5th what they were 5 years ago!

Why is the market giving it the benefit of the doubt when the worst is still ahead?

HOG

Harley needs a crisis manager. Will the incoming CEO possess those skills?

Planet of the Humans

Planet of the Humans is Michael Moore’s latest documentary which slays renewable energy – wind, solar & biomass – as well as electric vehicles which rely so heavily on fossil fuels in their production.

Think of it as Crony Capitalism 101.

QLD gov’t to subsidize the rest of Australia on Virgin bailout?

AA

You have to hand it to the Queensland Government’s absolute lack of awareness. It has intimated that it might fork over $200m in loans to rescue the airline. To call any airline a “family jewel” means one probably thinks Great Wall is the pinnacle of luxury auto brands.

Perhaps what Premier Palazczuk and Treasurer Trad miss is that by using Queensland taxpayer funds they would effectively grant residents in other states the full benefit of Virgin’s recovery for free. Furthermore, if Virgin didn’t manage to pay back the monies, Queensland taxpayers would undoubtedly be caught in a zombie lending scenario. So the other states would still benefit. Federal Treasurer Josh Frydenberg should be more than happy to see the sunshine state take his place.

We are surprised that so much umbrage is being taken at the idea of Chinese money coming in to subsidize the troubled airline. There is a sense of irony to see people cry nationalism when the airline has largely been owned by foreigners, 40% from China for a considerable time.

It is not as though the Chinese would treat Virgin Airlines like cans of baby milk powder and take all their planes home. Any rational investor would want to own a profitable airline based on juicy slot allocations rather than pursue relentless growth by building parallel tracks to already unprofitable destinations.

Sure, having an airline that boosts competition is a wonderful thing. We agreed with distressed debt specialist Jonathan Rochford’s summary which suggested insolvency as the best path forward. That way, hard decisions would be forced on Virgin and the restructuring would leave no stone unturned. Aircraft leasing companies have gone through this dance before and would be only too willing to act sensibly to help in the rebirth, especially given the appalling state of rail or road alternatives.

We understand people want to play hardball with China in a post-COVID19 world for its willful neglect shown during the pandemic. However, we must not let irrational fears turn away investment that benefits us, just because it is from China. Aussie investors haven’t supported Virgin much since the IPO in 2003. So why not let the Chinese do their dough? If we embraced their capitalist streak, were this investment to lower ticket prices, would we really complain? Or would we protest the idea that Qantas’ future might be at risk?

As comedian Dave Allen once said bout airlines, “they would make more money by leaving the planes at the gate and burning piles of cash on the runway!