Bitcoin Bubble #2

My goodness – Microstrategy adopts a treasury policy where half of their cash ($250 million) is invested in bitcoin:

MicroStrategy® Incorporated (Nasdaq: MSTR), the largest independent publicly-traded business intelligence company, today announced that it has purchased 21,454 bitcoins at an aggregate purchase price of $250 million, inclusive of fees and expenses. The purchase of Bitcoin cryptocurrency was made pursuant to the two-pronged capital allocation strategy previously announced by the company when it released its second quarter 2020 financial results on July 28, 2020.

The company addressed the first prong, which called for returning a portion of its excess cash to shareholders, when it announced today that it had launched a cash tender offer for up to $250 million of MicroStrategy’s class A common stock via a modified Dutch Auction offer. By acquiring 21,454 bitcoins, MicroStrategy addressed the other prong of its capital allocation strategy, which called for investing up to $250 million in one or more alternative investments or assets.

This is the first instance I can think of a company that doesn’t specialize in the field (i.e. an ETF dedicated towards purchasing bitcoins or mining them) that has thrown bulk quantities of cash into Bitcoin.

What’s even more amazing is that their stock went up about 10% on this news (in conjunction with the Dutch Auction Tender they proposed on the same day). I’m guessing the bulk of it was due to the dutch auction rather than the bitcoin acquisition, but who knows?

Will other companies follow suit and diversify their US cash holdings into alternative assets? If so, things will get quite interesting – and will likely inflate the price of Bitcoin. I also don’t know if this had anything to do with the huge drop in gold today, but I also note that long-term US bond interest rates took quite a leap as well. Interesting times we live in.

Finally, if you feel like you are missing out, take solace that the best store of value historically has been in ownership of competently managed businesses that will continue to produce goods or services that will be in demand for the foreseeable future.

Political arbitrage betting – US Presidential Election

There is no way for me to do this in size in Canada (Betfair would have been the best venue), so I’ll give this free arbitrage to the crowd following this site:

On most political betting sites, you can bet who will be the next president of the USA in the 2020 election. Trump is around 3:2 (bet $100, profit $150 if win), while Biden is around 2:3 (bet $100, profit $67 if win).

Legally, the Democrats have to nominate a presidential candidate very soon otherwise it becomes very difficult with regards to ballot access laws to have the name changed. During the 2016 election, the Donald Trump “grabbed her by the PXXXX” moment got a bunch of people interested in investigating the topic on how a major party candidate could be replaced on the ballot very late in the game. The conclusion is that by the end of August, things are more or less sealed up for a bunch of states and by mid-September most of the states are ‘locked in’. Courts would have to be petitioned at this point, which comes with obvious uncertainty.

It should be abundantly clear to a non-partisan observer that Joe Biden is suffering from dementia. It is getting to the point where the Democrats should be actively investigating whether they want him to be the nominee or not.

My arbitrage play at this point would be to sell Joe Biden (NOT Democratic Party) at this point and then liquidate the bet if he is formally nominated (which would be a neutral transaction, perhaps winning or losing 100-200bps or so in the process) or collecting a massive gain (100%) if the Democrats dump him from the presidential ticket. Hence the political arbitrage.

This would leave the question of who the Democrats would nominate, and that would be Kamala Harris, who you could get currently at 180:1 odds. I can’t find a place where I can legally purchase chances to win the Democratic nomination. After Biden is dumped I would then liquidate this bet (she would trade at least at 1:1 in the event of her nomination, so you would receive an ROI of around some 5000% percent in the process even if you got her at 100:1).

Betfair is closed to Canadians and would be one of the few credible venues where you can pull this off in any size. For those of you in the UK or elsewhere where Betfair is available, you’re welcome. At worst this is a neutral and at best you’ll get an ROI of 100% on your Biden “short sale”. I accept gift cards to fast food joints if you wish to express your appreciation after cashing in on this!

Words you don’t want to be reading in SEC filings

A company reported their quarterly results via press release last week, but today they released their 10-Q, and it contained the following paragraph that was buried in the usual accounting pronouncement boilerplate which wasn’t on their previous 10-Q. Pays to pay attention!

While we were in compliance with the restrictions and covenants under our debt agreements at June 30, 2020, as further described below, there is significant risk that we will not be in compliance with the first lien leverage ratio requirement under our credit agreement in the second half of 2020 without successfully taking mitigating action. Noncompliance with the ratio covenant would constitute a default under the credit agreement, and the revolving lenders could elect to accelerate the maturity of the related indebtedness, and could potentially choose to exercise other rights and remedies under the agreement. Further, our senior secured notes and certain lease agreements contain cross-default provisions which would be activated by a default under the credit agreement, which could result in a similar acceleration of maturity under those obligations.

I purchased some debt post-COVID in this entity, but took a moderate bath on it today by hitting the bid. Although the debt itself was senior secured (and on line with the credit facility), I do not want to be around for the probable Chapter 11 that will be occurring – unless if you have some sort of representation on a debt restructuring, the outcome is not likely worth going through the wait and you can always buy the entity again if it goes public after re-emerging from Chapter 11.

What it costs to run a cruise ship company

Just skimming through Royal Caribbean’s (NYSE: RCL) quarterly report:

The Company estimates its cash burn to be, on average, in the range of approximately $250 million to $290 million per month during a prolonged suspension of operations. This range includes all interest expenses, including the increases driven by the latest capital raises. It also includes ongoing ship operating expenses, administrative expenses, hedging costs, expected necessary capital expenditures (net of committed financings in the case of newbuilds) and excludes cash refunds of customer deposits, commissions, debt obligations and cash inflows from new and existing bookings.

$3.2 billion/year is an impressive burn rate, but when considering all the infrastructure it takes to maintain the vessels even when they’re not in use, it isn’t surprising.

As of June 30, 2020, the Company had $1.8 billion in customer deposits of which approximately $300 million correspond to fourth quarter 2020 sailings. Approximately 48% of the guests booked on cancelled sailings have requested cash refunds.

What is surprising here is customers would trust their currency in a company in an industry that has obvious material risks. The value of this capital is in the form of an unsecured on-demand loan paying 0% interest, which is an exceptionally good deal for RCL.

I did place an order to buy RCL stock in mid-May, but sadly the stock narrowly missed my buy limit before it set sail. You can see a chart of it and guess where that happened. Fortunately there were other fish in the ocean at the time.

Yellow Pages Q2-2020 – How to squeeze water out of basaltic lava rock

Yellow Pages (TSX: Y) is up around 25% today as I write this on their quarterly report showing that things aren’t as bad for them as expected.

Although year-over-year revenues are still declining sequentially (17% for Q2), cash generation continues to be extremely high. As-in, eye-popping high. Of $88.3 million in revenues earned for the quarter, this translated into $31.7 million in operating cash flow. For the half-year, these numbers are $176.6 million in revenues and $58.8 million in operating cash flow. Subtracting $4.2 million in capex and lease payments, this leaves $54.6 million in free cash flow for the half year.

They also gave out $2.9 million in dividends in the quarter (the first dividends in nearly a decade).

Needless to say, especially after Covid-19, this cash generation blew my expectations away by a mile. I have never seen anything like this before in a business, where cost controls in such a significant revenue decline situation still produces an amazing amount of cash.

On the downside, it is not entirely clear the impact of the CEWS program on margins; and the customer count continues to decline (32k lost from the previous year).

Yellow ended June 30, 2020 with $97.7 million in cash in the bank (my expectations were about $7 million less). Their only debt (aside from lease obligations) is $107 million in 8% debentures which will most certainly be redeemed on May 31, 2021. At this point, this debenture is almost as good as a 9-month GIC, earning 8% if you can get it at par.

Management also indicated that the cash balance on August 5, 2020 was $109.7 million in cash. This implies that in the 5 weeks since the end of the quarter, they generated another $12 million in cash (implying a $125 million cash generation run rate, or about $4.46/share). Note this could be misleading due to the timing of payments. However, if they can stabilize cash generation at even half of this level, the stock is vastly undervalued even at the current trading price of $10/share. This has always been the big “if” for the company. Management has alluded to some revenue initiatives coming ahead.

Yellow continues to remain one of my larger positions. I did some diversification during the COVID crisis, but the remaining amount is still significant.

I still believe the likely scenario for the company is going private. It is 75% owned by three major institutions, and this fraction goes up if they execute on their NCIB and suck up more shares from an already relatively illiquid public float.