Excerpted from an email which Whitney Tilson sent to investors

1) Over the summer, when 60 Minutes isn’t airing new stories, it typically runs greatest hits from recent seasons, so it’s not surprising that it’s re-airing the Lumber Liquidators story from March 1st tonight (Sunday) – I assume with an update that will, I hope, include the fact that the company continued selling the toxic laminate for more than TWO MONTHS after the story aired before finally halting sales on May 7th, that the CEO, CFO, head of sourcing, and chief compliance officer have all left, and that the company is under investigation from a half dozen federal agencies…

 

60 Minutes deserves to take a victory lap on this – it was an extraordinary piece of journalism that will, I confidently predict, win major awards.

 

(The 17 articles I’ve published on Lumber Liquidators since the 60 Minutes story aired are posted at: www.tilsonfunds.com/LLTilsonarticles.pdf and my latest slide presentation is at:www.tilsonfunds.com/LL.pdf)

 

2) This story on Amazon’s corporate culture, which takes up nearly half of the front page of today’s NYT, is a fascinating look inside a fascinating company. No huge surprises if you’ve read The Everything Store: Jeff Bezos and the Age of Amazon (which I highly recommend). A lot of similarities with Apple and Tesla (because of the many similarities among Bezos, Jobs and Musk). These are incredible companies, run by incredible, visionary entrepreneurs, but they really burn most people out – yet for a small minority of people, they’re the perfect place to work.

On Monday mornings, fresh recruits line up for an orientation intended to catapult them into Amazon’s singular way of working.

They are told to forget the “poor habits” they learned at previous jobs, one employee recalled. When they “hit the wall” from the unrelenting pace, there is only one solution: “Climb the wall,” others reported. To be the best Amazonians they can be, they should be guided by the leadership principles, 14 rules inscribed on handy laminated cards. When quizzed days later, those with perfect scores earn a virtual award proclaiming, “I’m Peculiar” — the company’s proud phrase for overturning workplace conventions.

At Amazon, workers are encouraged to tear apart one another’s ideas in meetings, toil long and late (emails arrive past midnight, followed by text messages asking why they were not answered), and held to standards that the company boasts are “unreasonably high.” The internal phone directory instructs colleagues on how to send secret feedback to one another’s bosses. Employees say it is frequently used to sabotage others. (The tool offers sample texts, including this: “I felt concerned about his inflexibility and openly complaining about minor tasks.”)

Many of the newcomers filing in on Mondays may not be there in a few years. The company’s winners dream up innovations that they roll out to a quarter-billion customers and accrue small fortunes in soaring stock. Losers leave or are fired in annual cullings of the staff — “purposeful Darwinism,” one former Amazon human resources director said. Some workers who suffered from cancer, miscarriages and other personal crises said they had been evaluated unfairly or edged out rather than given time to recover.

Even as the company tests delivery by drone and ways to restock toilet paper at the push of a bathroom button, it is conducting a little-known experiment in how far it can push white-collar workers, redrawing the boundaries of what is acceptable. The company, founded and still run by Jeff Bezos, rejects many of the popular management bromides that other corporations at least pay lip service to and has instead designed what many workers call an intricate machine propelling them to achieve Mr. Bezos’ ever-expanding ambitions.

“This is a company that strives to do really big, innovative, groundbreaking things, and those things aren’t easy,” said Susan Harker, Amazon’s top recruiter. “When you’re shooting for the moon, the nature of the work is really challenging. For some people it doesn’t work.”

Bo Olson was one of them. He lasted less than two years in a book marketing role and said that his enduring image was watching people weep in the office, a sight other workers described as well. “You walk out of a conference room and you’ll see a grown man covering his face,” he said. “Nearly every person I worked with, I saw cry at their desk.”

3) Roger Lowenstein with some common sense on stock buybacks:

Stock buybacks are suddenly controversial, with critics arguing that they are hurting the American economy, killing jobs, and manipulating stock prices and therefore must be banned. Bernie Sanders, the Vermont senator running for president, has made slamming buybacks a theme of his campaign. And William Lazonick, an economics professor at UMass Lowell, has asserted that banning buybacks is key to reviving the middle class.

Is this ordinary corporate tactic really so bad? Actually, buybacks are both useful and benign — and in no way warrant restriction. Let’s start with the basics: stock buybacks are a converse operation to stock sales. Companies issue stock — that is, they sell slices of equity — to raise capital. They buy back stock to retire capital. These buybacks occur for two reasons.

4) Krugman with some spot-on points about the goings on in China:

They appear to have been taken completely by surprise by the market’s predictable reaction; namely, the initial devaluation of the renminbi was “the first bite of the cherry,” a sign of much bigger declines to come. Investors began fleeing China, and policy makers abruptly pivoted from promoting currency devaluation to an all-out effort to support the renminbi’s value.

The common theme in these wild policy swings is that China’s leadership keeps imagining that it can order markets around, telling them what prices to reach. And that’s not how things work.

I’m not saying governments should never interfere with markets, or even set limits on prices…

…But these were short-lived actions, taken at times when markets seemed to have lost their bearings. Staffers at the Federal Reserve used to call these moves “slap in the face” interventions. That’s very different from the kind of sustained intervention and political dictation of prices China seems to imagine it can pull off. Do the country’s leaders really not understand why that won’t work?

If they really don’t, that’s a big concern. China is an economic superpower — not quite as super as the United States or the European Union, yet, but big enough to matter a lot. And it’s facing tough times. So if its leadership is really as clueless as it has been looking lately, that bodes ill, not just for China, but for the world as a whole.

5) Adam Davidson with some spot-on thoughts on Greece – and why lenders need to take a big haircut:

In hindsight, of course, we know that the investors should not have lent Greece anything at all, or, if they did, should have demanded something like 100 percent interest. But this is not a case of retrospective genius. At the time, investors had all the information they needed to make a smarter decision. Greece, then as now, was a small, poor, largely agrarian economy, with a spotty track record for adhering to globally recognized financial controls. Just three weeks earlier, a newly elected Greek prime minister revealed that the previous government had scrupulously hidden billions of dollars in debt from the rest of the world. In fact, the new leader revealed, Greece owed considerably more money than the size of its entire annual economy. Within a month of the bond sale, faced with essentially the same information the investors had, Moody’s and the other ratings agencies downgraded the country’s credit rating. In less than six months, Greece was negotiating a bailout package from the International Monetary Fund.

The original sin of the Greek crisis did not happen in Athens. It happened on those computer terminals, in Frankfurt and London and Shanghai and New York. Yes, the Greeks took the money. But if I offered you €7 billion at 5.3 percent interest, you would probably take the money, too. I would be the one who looked nuts. And if I didn’t even own that money — if I was just watching over it for someone else, as most large investors do — I might even go to jail.

Today, the global bond market is twice the size of the stock market. And while bonds barely move in price compared with stocks, bonds’ slight twitches give far more important information. A slight increase in a bond’s interest rate can serve as a warning that investors no longer trust a company or a government quite so much; a drop in rates can be a reward for hard work accomplished, allowing an institution to raise future funds at a lower long-term cost. But a world of bonds works only when the investors who buy the bonds are extremely nervous and wildly cautious. Bonds, that is, are designed to be safe and boring investments, bought by extremely conservative institutions, like pension funds, insurance companies and central banks. When they are bought by (or on behalf of) private investors, they are supposed to represent the more stable portion of the overall mix. The very nature of stock markets inclines them to collapse every decade or so, and when they do, it can be painful. But a stock-market collapse is not debilitating. If the world bond market were to collapse, our way of life would be over.

On Sept. 17, 2008, in the late afternoon, this almost happened. For a few dramatic days, prominent economists and other financial experts — serious, unemotional people who had never before said anything shocking in their lives — talked privately, if not publicly, about the real possibility of the end of the United States, the end of electricity and industry and democracy. When the bailout money flowed to save the banks, that was just the fastest way to accomplish the real goal: to save the bond market.

And in that moment, the essential nature of the bond market shifted. Previously, the stability of bonds was reinforced by the cautiousness of people who owned and managed them, and vice versa. But the bailout broke this virtuous circle, signaling that the bond market would stay safe even when bond buyers were wildly reckless, pouring billions of dollars, for example, into risky subprime-mortgage bonds. The bailout represented a transfer of wealth from the rest of the economy into the bond market — precisely the opposite of what is supposed to happen. Now, in the moral hand-wringing over Greece and its failure to pay, we see that bondholders expect to be bailed out constantly, even when they were obviously culpable in failing to manage their own risk. The various European Union plans for Greece involve what is essentially a transfer of wealth from poor Greek people to wealthy German bondholding institutions.

The institutions that bought that €7 billion in Greek debt in 2009 made a very bad judgment. Even at the time, it was clearly a foolish gamble — so foolish, in fact, that it can be explained in only one way. They believed that in the event of default, the Germans would bail the Greeks out. And just to be clear: This doesn’t mean they believed that the Germans would be kind to the Greeks. It means they believed that the Germans would be kind to the people who owned Greek bonds, a significant percentage of whom were certain to be German themselves. In lending money to Greece at 5.3 percent interest, they weren’t calculating Greece’s ability to pay. They were calculating the German government’s willingness to help out German banks.

6) With the exception of UNIS, I haven’t had much luck shorting medical/phama/biotech promotions and/or frauds (think Questcor; glad to see Mallinckrodt (MNK) finally getting hammered for being dumb enough to buy it) so unfortunately I didn’t short INSY upon reading Roddy Boyd’s in-depth expose (below) (it’s down from ~$45 to $35 since then), but it’s a heck of a piece of investigative journalism.

Slowly but surely answers to the many riddles of how Insys Therapeutics could achieve its mercurial success are beginning to emerge.

The Scottsdale, Ariz.-based pharmaceutical company has only one commercial offering, a sublingual Fentanyl formulation called Subsys, whose sales growth has managed to double its market’s size, to more than $500 million from an estimated $225 million since its approval and launch in March 2012, according to executives at rival companies. In turn, the upward march of the company’s share price has turned its growing legion of supportive brokerage analysts and money managers into minor geniuses. (Southern Investigative Reporting Foundation readers will recall Insys from an April 24 investigation of the drug’s mounting number of lethality cases and the company’s unusual marketing efforts.)

Therein lies the rub.

Subsys is approved only to treat breakthrough cancer pain. The market for such drugs was estimated to have an annual growth rate of about 10 percent in the spring of 2012, according to former Insys sales staff and rival pharmaceutical executives. Instead, on March 21, 2014, about two years after its launch, Subsys managed to nose past Cephalon’s Actiq, then a leader in this narrow category, in number of prescriptions written, according to IMS Health data obtained by SIRF; last September Subsys took the lead for good.

These opioid drugs are so potent that the Food and Drug Administration created a stringent prescription protocol for them (known as TIRF-REMS), with multiple steps for a patient to go through before a prescription is dispensed.

Yet according to Medicare Part D records for 2013, no oncologists appear on the list of Subsys’ biggest prescribers.

Given this apparent lack of support from oncologists, it appears odd that insurance companies seem to have embraced Subsys, continually approving its reimbursement at a level none of its competitors can obtain. A leading Subsys prescriber told the Southern Investigative Reporting Foundation that in his estimation, “Insurers cover over 90 percent of [Subsys prescriptions] for at least one [90-day] cycle,” whereas rival drugs appear to have an approval rate hovering at 33 percent. The doctor’s account of a chasm between how insurers treat Subsys and how they deal with its rivals was corroborated by a senior executive at an Insys rival and three former Insys sales staff members.

But it was not until records in the Centers for Medicare & Medicaid Services Open Payments database were released in October 2014 — covering the last five months of 2013 — that a linkage could be more readily detected between the volume of Subsys prescriptions and payments to doctors.

As Insys’ share price continued to trend upward, Wall Street’s brokerages found it easy to promote the company’s business practices, as a Jefferies research report from December shows.

But now federal prosecutors are peeling back the veil to reveal a black world behind Insys’ earnings. The initial results suggest they do not condone what they are seeing.

Whitney Tilson Lumber Liquidators
Lumber Liquidators