Idea Blitz

TUI - severe management mistakes

2008-01-30T15:34:00.000+01:00

If one wonders about the poor performance of the former German conglomerate Preussag now named TUI AG the reasons seem clear.

Condensed to one word, the company suffers under severe mismanagement.

Clearly visible in the development of TUI's stock price the decisions of the past have left their mark.
One example of this fatal decisions is the acquisition of the Canadian shipping line CP Ships in August 2005.

For a record price of 1.7 billion Euro, TUI's CEO Michael Frenzel paid 60% more per TEU than Maersk Sealand for P&O Nedlloyd in the same year.

But in contrast to Maersk Sealand TUI didn't neither have a focus on container shipping nor the necessary reserves to weather a industry downturn.
Since the container shipping industry experienced a severe retreat from the frenzy in late 2005 the acquisition remains under fire.

So Mr. Frenzel "Daddy Deal" took measures to protect his employment. To make sure that the drag from the container shipping segment within TUI remains manageable he merged the tourist segment with the British company First Choice.
This way he has created himself a currency for further deals yet to come as he is able to sell shares of the newly created TUI Travel PLC.

Meanwhile the valuation of the German parent TUI AG seems stretched. With a stake of 40-45% (ca. 1.7 bn Euro) of TUI Travel PLC remaining, the current stock price puts the value of the Hapag-Lloyd subsidiary at about 2 billion Euro.
Very lofty for a shipping line with about 6 billion Euro revenue that is currently amassing losses.

With the US economy in free fall and major Asian economies like the bellwether Singapore sharply weakening the prospects for global trade look gloomy.
Adding to this a flood of brand-new container ships is circulating in the industry, always seeking capacity to fill.

This will inevitably lead to falling freight rates. And the longer the current economic weakness around the world persists the more pressure will build up at weak companies like Hapag-Lloyd and his parent TUI.

The end of the story could be that - as history has proved so often - such players are wiped out exactly at the turning point of the cycle.

So far, we are nowhere near the bottom.

Fuchs - total domination of the German spice market

2008-01-11T13:23:00.000+01:00

If one wonders about the high prices for spices in some German supermarkets: it's because the consumer pays monopoly prices.

Since many years one big player dominates a market with initially only a few visible entry barriers: FUCHS Gewürze GmbH.
According to a paper from the German antitrust agency, FUCHS, second only after McCormick & Co, in fact holds 60-80% of the German market for spices.
This after the company was allowed to buy its biggest competitor in October 2000.

Competition is weak and diverse with no one holding more than a single digit percentage of the market and most companies only achieving one-tenth of a percent market share.

But how is this possible?
According to the German antitrust agency FUCHS controls the most important distribution channels. By signing exclusive supply contracts with almost every German supermarket chain, FUCHS makes sure that no competitor is able to sell his spices in bigger volumes. These contracts often contain payments from FUCHS to the supermarkets, averaging 2.500 Euros per store.

The business practice is profitable for both. The supermarkets get an extremely high return from every sold unit, usually 50%. FUCHS achieves record margins and doesn't have to invest in his brand since it is omnipresent.

FUCHS was also able to take out the competition by buying them. German antitrust laws dind't apply because a revenue criteria wasn't met. The company also has signed "peace contracts" with it's biggest competitors only attacking selectively and regionally.

This continuing practices allow FUCHS to charge the maximum willigness to pay from every customer and also highlights one major weakness of German antitrust laws: The barrier of 500 million Euros regarding the combined revenue.

This revenue barrier also means a potentially successful business model for private equity companies, simply by combining all major players in a small- or midsized market and then charging monopoly prices.

CAGR of FUCHS from 1997-2002 : ca. 15%

Intense competition in Bangkok's taxi market

2007-11-19T14:48:00.000+01:00

On my last visit in Bangkok (my first) I was stunned by the magnitude of the city.
It is defenitely true that Bangkok represents the economic and socio cultural heart of Thailand. As it is difficult to get around in the city - partly because of the sheer magnitude and partly because of poor public transportation - a taxi is a necessity.

Now if you visit the city you'll instantly notice the density of taxi cars. My estimate - without having further data - would put the total number of taxis at around 30-40% of ALL cars. That is certainly an impressive number, suggesting intense competition in this market.

The truth is that the competition is even more intense that I would ever imagine. A short ride is as much as 1 US$. Incredible, since this short ride could even last a few kilometers. 60-70 Bhat, that is around 2 US$, bring you to most destinations within the city. I once travelled 15 minutes for 70 Bhat.

Since most of the taxis are relatively new this could only work at the expense of training. The result is that most taxi drivers don't even know main streets.
The other results are very low wages for taxi drivers.
One taxi driver told me that driving the whole night (at evelated fares) typically yields in not more than 10 US$ for him.
Even for Thai standards this represents a low income.

The question is: How long will this go on?
Obviously the profit margins for the taxi companies themselves have to be really low since it is very doubtful if the low fares cover for the writeoffs of the often brand new taxis.
Rising oil prices will put additional preasure on the market. With not many chances to pass the price increases to the consumer, most taxi companies will face preasure.

Additional preasure could arise from financing. Although I don't have any insight into the depth of this market I suspect that many taxi companies were able to finance themselves at low interest rates, making the leveraged purchase of a taxi attractive.

If now the financing costs are set to rise this could spell trouble for anybody who wants to leverage something.

Maybe this situation even represents a kind of rising inequality in developing countries, with a disproportionate share of the nation's income earned by already rich individuals.
All in all I'm courious how long this intense competition can hold up.

Odds:

Steep rise in Bangkok's taxi fares during the next 3 years : 55-75%

Being cheated with a taxi ride: at least 10%

OPEC says no need for oil output hike

2007-11-14T15:11:00.000+01:00

Daily garbage what comes from OPEC officials.

"...that there is no need for the oil cartel to increase production now because there is plenty of oil in the market..."

Yahoo News, 11/14

Here a few reasons why al-Badri is wrong:

1) If there is no demand for more oil why is the price going up?

2) If the price is going up because of investors who by oil Future contracts:

2.1) Where is the oil stored? If I go long on an oil Future contract, the oil has to be there on the day of delivery. What should be observed is a massive buildup of oil inventories anywhere in the world. Since that doesn't happen the obvious reason for rising oil prices must be demand.

3) Why isn't OPEC/Saudi Arabia active on the markets itself? Since this 100$ oil is only a "bubble", why don't they just short the contract and by this way make a lot of money?

4) What about some new explanations? We already heard the "lots of supply theory" at 40$. The statement stays the same, the price goes up.

Equity in US homes

2007-11-14T12:10:00.000+01:00

An interesting fact about the crash of the US housing market is that
as a result home equity levels will drop significantly.

As said by numerous sources the average US homeowner has an equity level of 52%.
If these owners that have no mortgages are excluded, the typical "leveraged" US homeowner arrives at an equity level of 37%.

A simulated decline in total US homevalues of around 10% then results into a reduced equity level of only 26%. That represents the average leveraged US household, of course. What will happen to these who already borrowed 90% of their homevalue?

The logical consequence is at least further rising foreclosure numbers. An other logical consequence is greatly reduced willigness to consume once the threat of foreclosure nears. This may be the final end of the "home ATM".

Try my tool:

Equity level simulation

Why is oil getting so expensive?

2007-11-08T12:37:00.000+01:00

It is a ritual: With every new oil price record the press is storming out and presenting an ever increasing number of reasons. From unrest in Nigeria, over the violence in the middle east in general to tensions between Turkey and the Kurds.
That naturally confuses. But as always journalists often don't tend to scratch under the surface.

If one ignores the daily noise and digs deeper into the material an other, very important explanation arises.
Other than geopolitical events that don't influence physical production one reason for high oil prices, if not the reason could very well an imbalance of supply and demand.

As the demand is growing rapidly due to economic growth almost everywhere in the world the supply, the oil production, seems to tend sideways.
And it tends sideways for quite a while. Even, when with very high oil prices every incentive to ramp up production is given.

The concept that captures this all is known as Peak Oil. Peak Oil basically says that global oil production follows a bell shape curve. And a curve of this shape has naturally a peak, a point after which oil supply will ultimately decline.
The concept itself has been proved as true since peaks were observed in a number of countries. It is also a coercive result of basic logic, since the ammount of oil in the world is limited.

The question is: Is this Peak Oil? Are we at the tipping point?
If true it will certainly have the consequence of very volatile and high energy prices as "weak" consumers will be priced out of the market.
It also means a tremendous amount of power in the hand of those who own and produce oil.

An overwhelming amount of data points to a peak that already happened or will happen in a very short period of time.
To quickly summarize some facts:

- The massive increase of rigs in Saudi Arabia with slightly declining production

- The basic tone of IEA, switching from passive to agressively warning

- Efforts from the Chinese government to seize control of oil fields overseas

- Massively declining production (10-20%) in the North Sea and the Gulf of Mexico

- Rapid maturing of the biggest oil fields

- Very little new discoveries in regions far away from human population centres

For further research, The Oil Drum, presents a very good collection of articles.

Odds:

Peak Oil is here: 35-65%
Press talks about Peak Oil soon: 75-85%
Average oil price of 100$+ in 2008: 40-60%

Financial stocks in crisis mode

2007-11-08T12:12:00.000+01:00

The recent share price plunge at Citigroup looks even more impressive if one looks at the big picture. Massive rising volumes and a very quickly falling stock may suggest that a bottom is not in sight.

Especially when it comes to risk: in a financial world that is a complex no one really knows where the dead bodies are. Especially when it comes to exotic financial products which involve derivates ("financial weapons of mass destruction").

A few months ago it was widely believed that the investment banks managed the risks of for example Mortage Backed Securities by simply passing them to investors.
With the horrible extent of the losses now slowly coming clear it once and for all shows that banks that leave the path of traditional retail banking and try to generate profits by riding the waves of the global financial markets are always to some extent exposed.

When there are big profits there are very often always big downsides in the financial world. If one chooses to ignore this basic rule, he later has to pay the price for this.

Rapidshare - Piracy 2.0

2007-09-25T12:20:00.000+02:00

Just at the time when the media industry began fighting back and
covered cyberpirates with lawsuits a new business model appeared at the stage.

Rapidshare, after a rocky start grows really rapid with sales surpassing 5 Million $ a month (own claims) the websites is one of the most popular sites on the whole net.

But where does this interest in filehosting services come from?
Why are so many people exchanging so much that the company needs 3.5 Petabyte capacity?

The answer is that the majority of rapidshares customers could be in fact cyberpirates that are changing their way to share their files.
Current lawsuits concentrate on a very specific group of softwarepirates using tools like EMule or BitTorrent.
These tools enable them to share media files on their computers with others.
In fact if one trys to download a movie of 700MB you could end up being "supplied" by 30 other users around the world.

For the user of these tools this practice grew increasingly dangerous. The music industry targeted large group of users that shared especially many files - suing them in fact not for downloading illegal material but for sharing it with others.

Although the sucess of such measures remains to be at least marginal considering the still massive international traffic it seems that the shock and awe policy has created a opportunity for Rapidshare.

For the pirates it is almost safe to download from Rapidshare since the effort to nail somebody down would be immense. Additionally it is very convenient since the download speed exceeds everything ever seen so far.

Acknowleding this new instrument the media industry is shifting their efforts towards attacking the content providers, the "release groups".
If these efforts bear any fruits seems to be doubtful.

In contrast, the trend that started in about 1999 and is continouing to this day is that media content transforms into a common good.

Conclusions:

- Likelihood of success of the media industry in fighting global piracy: 0-5%

The FED cuts

2007-09-24T12:27:00.000+02:00

A interesting observation regarding the rate cut earlier this month:
Ben Bernanke himself made a clear statement that he will take immediate action once it becomes clear that output growth is threatened.

Bearing this in mind it definitely could be a sign of a weaker US economy ahead. Given the magnitude of the numbers involved the often citated "wealth effect" is likely to be the dominant factor behind US citizens cutting their consumption expenditures in the coming months.

Of course it is very interesting how fast this will happen. The stock market right now shows no signs of an imminent recession - being close to all time highs.
But to put it into a nutshell I strongly believe that the stock prices with P/E ratios that are based on historical record margins and an almost 17 years ongoing economical boom (with one small interruption) are not reflecting the true state of the US economy.

A rate cut will not change the underlying trends and problems that threaten to hamper future growth. And it certainly will not solve problems like weak peronal balance sheets that seem to become a mass phenomena.

Conclusions:

- Odds of a US recession in 2007/Q1 2008: 60%
- Odds of a US recession in 2008: 75-80%
- Another round of rate cuts: 90-99%

First post....

2007-09-23T13:05:00.000+02:00

If you would like to respond to my thoughts or contact me please feel free to express yourself by using the comments.

Ideas and comments are of course always welcome.