Sudden Stop

Governor Patrick Spins Evergreen

Yet another energy source, the power of spin.

Governor Deval Patrick, in response the Boston Globe criticism of the state's investment in Evergreen Solar defended his decision:

The company has increased sales in the last year by more than 50 percent, and recently raised over $70 million in the capital markets. 

Technically correct, with revenue rising from $69 million in '07 to $112 million '08.  But, look at the $102 million of revenue in '06 and you realize that ESLR hit a serious bump in the road, and only now is recovering to '06 level of sales.  Further, and more important, the $112 million in sales carried with it an enormous cost overrun, leaving the company with nearly $100 million operating loss in 06, and a sliver of an operating margin of under 2%.  As for the $70 raised in the capital markets, that was a private placement in China to license technology-not evidence of expansive capability, but rather acknowledgement of i) the company's cash needs ii) tacit recognition that US production can't, with its high cost struture, penetrate the Chinese markets, so what's to lose by sending the technology to China for a few bucks.  

Since then, Evergreen has grown to nearly 700 employees -- more than doubling its Massachusetts-based payroll, twice the number of jobs they committed to create.  They are great jobs, with benefits, and they belong to our neighbors right here in Massachusetts.

700 jobs for $63 million.  That's $90,000 per new job, spent on a facility that appears to be failing economically or at least destined to manufacture a commodity product with expectedly boring margins.  How can a company continue as a going concern with a 1.9% margin.  Answer: it can't.  How to fix.  Answer: cut costs.  The largest cost is labor; Massachusetts labor is expensive but since the company is at least in the short run doomed to operate here, it will probably not close but rather, undertake to minimize the expansion here (i.e. no more jobs) and seek out the lower cost markets (i.e. China).

ESLR's model is this, and it's not healthy: Success depends upon i)  government subsidized facilities and sales and ii) a process that minimizes the cost of material (silicon).  The trouble with that is this, ESLR sells principally to Germany and Spain.  Those countries are beginning to cut subsidies.  A common sense reminder that if an individual isn't willing to overpay why should the government. 

To the second point, while the company's process results in silicon savings, the higher US labor and overhead have quickly wiped out the material content saving (to wit: 1.9% profit margin).  Meanwhile more silicon producers have come online, driving down the cost of silicon, there minimizing the value of the company's process.

On a bright note, it appears to be fairly valued by the market place at a capitalized value of about $400 Million.    With approx $170 million of net current assets and long assets of $822K less  debt of $320K, there's value in the current $1.80.  It all depends on the cash burn rate and the company's ability to persuade the "hope and green" politicians like Governor Patrick to subsidize the dream.

Disclosure: I have no position, short or long in ESLR.

Nevergreen Solar

When we wrote this in 2008 it wasn't because we saw the future and it was bleak for Evergreen Solar, but rather because, who knew?  But, through the hubris of the Patrick administration, we, the taxpayers are the investors of this Solar dog, Evergreen Solar, a company whose attraction was that it was allegedly green with a well spring of green jobs built on subsidized land and a process that stressed cheap material costs. The Patrick administration was in at about $20 bucks a share; ESLR is now trading under $2.

Solar's not that green when you consider the waste disposal issues.  Subsidized land isn't that cheap.  Well, it is cheap for Evergreen, just not cheap for you and me.  And the notion of cheap material costs were all the rage when silicon was more expensive.  But since new silicon production facilities are online, the savings on a low silicon process, which is after all, just sand, isn't all that much of an advantage anymore.

Burning cash is the new green energy source.

Why Fiscal Conservativism Fails

Never mind that the cost of living has declined over the past year, or that many of those receiving social security aren't reliant on that as their retirement income, or that the Social Security system is underfunded, or that calls for additional "stimulus" from the Federal government are rediculous in light of the info that much of the already passed shovel ready stimulus wasn't exactly shovel ready, and therefore hasn't been spent.

Because the cost of living has declined, there's no increase in benefits.  But, old folks want a raise; democrats seek to pander to that voting block.  End of story. 

Who is Ernie Boch III

Who is Ernie Boch III:.  Well, he could be Chad Riley.  The intersections are compelling replete with references to the Holy Cross, the Fells, etc... That's the first guess. EBIII disapppeared from the blog scene during busy months leading to the November 2008 election, then surfaced on November 11 or November 12.  Along the way too many similarities in topics and positions to easily ignore.

But, at age 40 or thereabouts, Riley might be too young to write what EBIII has written.  True that Riley does have the DA background sufficient to give him street cred to technically criticize and excoriate Dan Conley, Suffolk County DA. 

Further as a rep from Stoneham and its Ernie Boch auto mile, who better to borrow the Ernie Boch name

Setting aside the Riley speculation, if it's not Riley, then EBIII's more likely at least 45 year old. He's lawyer,employed by or elected by the Commonwealth (this is Massachusetts, who isn't?) perhaps as a staffer on Beacon Hill.  He’s a minority, let’s assume a black guy with some background in Criminal law and his first name starts with the letter “N".  

Lawyer.  That's easy.  Just read his comments Over 45.  His posts are replete with references to Massachusetts politics, going way back.

Minority with name beginning with "N".  Pretty speculative, but EBIII began right about here. Prior to that on the same blog, there was a frequent contributor signing anonimously with "N" with similar writing style.   The "N" was a means to be recognized as a consistent commenter, yet anonimous still. What else other than a name.

First guess, Riley.  Second guess, a staffer or friend/supporter who is closely connected to Mr. Riley.

But, but, but, we're really not Taxachusetts

Massachusetts Budget and Policy updated its favorite topic for 2007 and spun its view of the  most recent ranking of Massachusetts as a tax collector: 

Massachusetts dropped in rank from 35th among all states in 2006 to 38th in 2007 (including the District of Columbia).  Measuring taxes as a share of total personal income allows for a meaningful comparison among states. 

The conclusion begs the question:  does measuring taxes as a share of total personal income allow for a meaningful comparison?

If a citizen of a rich state a poor one pays $1.00 to adequately light the collective street light, because the rich state pays a lower percentage of  income for the same priced light, does that imply that the rich state can or should pay more in taxes, to get, say, a brighter light, or more lights or a more highly paid state employee to change light bulbs as necessary.

Or this.  A quick look at the two leaders, Alaska and New York.  That these two states lead the pack as tax collectors  in 2007 says little as a comparison except that Alaska pays a lot on energy profits and New York pays a lot from profits on Wall Street.  Interesting comparison maybe; meaningful hardly.     Massachusetts ranking in the lower 1/3 says more about its wealth and taxes derived from large city Boston spread over a relatively small state.

Mass Budget and Policy is as usual spinning red meat for its blue causes.  It's giving scant political cover so the tax raising politicians can proclaim we're in the bottom third of the tax collecting states (whisper: read the fine print).

Let bias:  Taxfoundation.  In per capita state tax paid, the State was in 2007 ranked number 23.  High enough.

Globe's Rose Colored Recovery

Headline:  Massachusetts may outpace US in economic recovery.  Fine print:  may not.

For economic green shoots, the Globe's cites a lower than national job loss rate (down .5% over past 3 month compared to negative 3% national rate), home sales increasing 50% over the same prior 4 months of 2008, and some key industries (not real estate) that will profit from global markets.  The article marvels that no Massachusetts bank has failed, a sign I suppose that our banks are stronger than the average US bank.

Blue blogs swoon over the speculation inspired by the Globe, that the Democrats, and in particular Governor Patrick have saved the state from financial disaster.  Somehow giving Deval Patrick or the Democratic party credit or blame is probably as accurate as crediting or blaming sunspot activity for the economic information.

Whether or not the scant optimistic data are signs of recovery remains to be seen, and the Globe buries the uncertainty deep in the article.  Stating the obvious, unemployment continues to rise (you know with 9.1% unemployment, the State of Massachusetts seems frankly downright average when you consider the US rate is 9.7%) and the 50% increase in sales over 2008 is another way to say that nothing was selling in September 2008 or another way to say that "ok, so I missed calling the bottom back in July: I'll try again".

And on those Massachusetts banks that haven't failed, note the cease and desist action from the FDIC on this particular Brockton bank.  Note too, that nine banks in Massachusetts took billions in bailout money from the Feds.

Health care crisis

Here, where vacant derision is a poor substitutes for lack of wit, this back and forth:

Comment: "It's because there is no crisis of health care."

Response:  "This statement is one of the most idiotic statement made on this blog in months--even considering some of the uber-wingnuttery we've seen lately.  If I didn't read this here, I would likely have concluded that this piece of convoluted "logic" came from The Onion ..."

Manufactured Health Care Crisis, American Thinker.

Less Speed in Health Care Reform.  "What if the health care crisis really isn't one?"

Age, Obesity, Lawyers--That's Our Health Care Crisis, Forbes.

Seems that the intitial "we've got a crisis" needs to be better questioned before plowing ahead to fix what may not be broken, the outcome of which is pure speculation.

RIP, et. al.

As legacies go, Ted Kennedy had a long run, associations with lots of history and people, the last of Camelot and died with his major accomplishment being "he really tried to get healthcare passed".  Rest in peace.  Ted Kennedy was a political train-wreck, an accomplished politician.  People change, but based on the events of  Chappaquiddick, I rather believe he wasn't  a very good person, at least then.

~

The Supreme Judical Court put a knife into the heart of the overreaching Massachusetts Department of Revenue, 

Some tax specialists saw the case as a way for Massachusetts to significantly broaden its taxing power, thus increasing costs for consumers and large retailers such as Best Buy and Sears, Roebuck and Co., that sell expensive appliances and other goods in New Hampshire. 

Viva Liberty.

~

Three years into Universal Health, Massachusetts is home to the most expensive health insurance in the country.

~

Secondary to the more emotional talking points about health insurance reform is the notion that's it's mandatory.  Can the US possibly be on board with that?  It's certainly not one of the main talking points for now.

Healthcare, what a deal!

Healthcare:

1: It will cost $1.04 trillion over 10 years.  Wow! The alternative's more? Show me, because, I'm old school.  Someone proposing change bears the burden of proof that it's better.

2: Individual Mandates: buy or else pay a 2.5% penalty on AGI.    

Questions:

-"Thanks very much, if I'm 25 earning 50K, I'll take my chances with $1,250 per year suckas 'cause I'm indestructible rather than pay $300 per month for insurance I don't need."

-Where's the libertarian argument here? Ah! There it is and from a liberal blog no less.

-Why does big Pharma supports this plan?  45 million new pill popping customers.  Yum.

-Why does big insurance supports this, and not the Public Option.  Answer: 45 million new insurance customers.  Also yum.

-What's to keep my employer from dropping current coverage, letting employees adopt the Public plan, and then, if physician doesn't participate in the public plan, I'm compelled to select a new physician.

3: Establishes insurance exchange where consumers can compare policies and buy coverage, with credits up to 4x the poverty level.  This is where the Public Options comes into play.

My question:

-If the Public Option is a Federal 'agency', is it subject to State Insurance commission scrutiny (probably not) and if it's not, then how can there possibly be a level playing field with the various State insurance companies who don't have access to nearly the large pool?

4: Employers to provide health coverage or pay a fee to the government of (depending on version of plan) 8% of wages.  

Questions:

-Cost per employee now for insurance on nationwide average is around 9%.  States like NJ, MA, NY, RI... (the community rated states) have higher costs.  High cost state employee now have an incentive to drop coverage and pay the 8% tax instead rather than their current higher costs, right?  Drop coverage => new coverage => possible loss of current doctor.

-Perhaps the 8% surcharge is the WalMart tax (i.e. tax on employers who don't provide coverage already)? Ah! But i) WalMart DOES favor health reform and ii) WalMart already provide coverage.  Why on earth would WalMart support reform? Answer: because it, with it's high fixed cost coverage spread over it's own large population of employees, it will have a competitive advantage over newcomers into the market who'll now have to pony up 8% to the government.  Clever WalMart. Health reform helps WalMart.  Who'd a thunk it?

5: Bars insurance companies from denying coverage and eliminates insurance company lifetime caps.

-Is that to say that I can fail to buy insurance until the day I'm rolled into the ER with an expensive illness at which point I'm followed by a doctor, nurse and insurance salesman?  What's the incentive to get insurance if I'm young, healthy, earn less than say, $50K per year (2.5% x $80 = $1250 yearly penalty), and can get insurance at a moments notice, if ill?

6: Reduction in spending for Medicare and Medicaid.

-Come again?  Details? If this is such a good idea, why haven't we done it already?  Or, is this like that 'waste' thing every politician has run on for decades?

-And if it's not a hollow promise of eliminating waste, then are there plans of specific reductions? Again, specifics. (kill granny, kill granny....)

-Why are all the elderly showing up and shouting 'lies'.  Answer: it's because the reform plans reductions in Medicare and medicaid and the plan is so vague that it allows opposition to postulate how in fact spending will be reduced.

Blaming the debt, when it's the debtor

Let's suppose that your kid runs up a credit card bill of $10K on fast women and beer, then comes to you for help.

You run the numbers and tell him, "I'll give you 1% of my salary for the next 15 years and that'll take care of the debt".  Then you arrange for an auto-deduction from your pay to his bank account.

Over the next several years, he runs up the credit card bill, using your 'contributions' as collateral for new debt.  

In addition he buys a cool car, and a nice back bay apartment and has a new high maintenance babe.  To make things worse, you catch a 10% pay cut, so as a result he receives a bit less from you. Now, he comes to you in crisis mode because his salary has only increased at about 1% per year while his expenses increased 10% per year.

Was the problem the 'debt dumped onto him or was it the spending?

Now analogy over to the current MBTA crisis.

In the 90s, there was an unprecidented expansion. Fair, unfair, legally mandated or not.  Seriously, who cares if it was legally mandated.  BTW, all that means is that the Commonwealth of Mass agreed to select a list of projects in exchange for taking Federal funds for Big Dig.  Legally mandated or not, local pols love these projects for their community. 

Ridership cracked 300 million annually in 1991, rising in starts and fits. Extraordinarily mediocre growth to the current 370 million today.  To date, from 1991, the ridership only grew, at a rate of somewhere around 1% per year.  

The numbers were entirely predictable too.  On established systems, Transit ridership grows as a function of per capita income (ridership actually falls as per capita income grows)  and alternative transport prices, and not with an 'if you build it they will ride' mindset.

The crisis pols say, MBTA says is the result of the debt from the legally mandated debt.  So, let's look at that debt.  Where did it come from?  The common cliche is that  it was dumped onto the MBTA, pollution remediation projects as result of Big Dig.  Go with that and consider the expansion costs.  We'll go Line by Line.

-Silver Line: Washington Street Replacement Service.

-Silver Line: South Boston Transitway and Airport

-Orange Line: 18 new cars plus and Signal System

-Blue Line:  Increase platform size to meet 6 car trains.

-Blue Line: modernize stations

-Green Line: extension medford hills through somerville.

-Green Line: move lines to accomodate big dig.

-Red/Blue Line Connector at Charles/MGH.

-Arborway Restoration. Restore Green Line in Jamaica Plain.

-Restore the Old Colony Line from Weymouth to Hingham.

-Upgrade bus fleet

-TF Green Rail Service.

That's not all of them, but it's most.  There used to be a list on line but it was taken off years ago.

These projects were complete, and who better to maintain them than the MBTA?  It's their projects!  Finneran et al, knew that the debt couldn't be 'self-funded' and allocated 20% of the State's sales tax to the debt service, an amount that absolutely would cover the debt service.

Growth in sales tax was optimistically projected. But, more importantly, no one admitted to the  insatiable appetite of the MBTA.    The tax cash flows from sales tax were used as collateral for additional expansion and worse, operating costs.  

Capital invested increased from 6.3 billion in 2001 to 8.0 billion in 2008, or about 4% per year; costs continued at 10%.  Ridership continued at 1%.  You getting the math here? Cost rising at rate exceeding revenue.  

Eventually, (today) costs + expansion + drop in sales tax cause the current crisis.  Everyone points to the debt, because it's an easy one-line scape goat and it's the thing that now, cannot be paid BECAUSE THE MONEY FOR THE DEBT WAS SPENT ELSEWHERE.  

Far easier to meme "it's the debt" than actually parsing the numbers: ridership, costs, expansion, tax collection, fares to see the true story:

MBTA expanded too fast, spent too much for ridership that never materialized.