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Carvana Co (CVNA): A Unicorn With Donkey DNA?

Carvana Co (CVNA): A Unicorn With Donkey DNA?

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Carvana Co (NYSE:CVNA), the “disruptive” used car dealer, aka the “Amazon of used cars”, has had a tumultuous 2020 and it is only May. Entering the Year of the Rat at $88.00/share, the well-baited trap of mid-March saw a 65% swoon to sub $30.00 before a miraculous resurrection to the current $98.00 print  (hundy roll intra-day 8th May 2020), now sporting a market capitalization of an eye-watering US$16bln (within 15% of ATH). Nausea inducing moves are not new for the “Glengarry Glen Ross” of the on-line car business. Carvana Co IPO’d a mere 3 years ago in May 2017 at $15.00 (15mm shares, raising $225mm for early backers and still Chairman, Ernie Garcia III). Day 1, Carvana Co trade went over like cotton candy at a diabetes convention, -26% to close at $11.10. Most IPO’s are “priced to perfection” to allow for a 20% bounce out of the gates, as Cloudera $CLDR did on the same day, co-incidentally at the same offering price base of $15. Cloudera may have had a heavenly “cloud” story, but the stock has swooned 44% since, and it currently trades $8.50/sh., much in contrast to the near 9 banger Carvana has delivered since that inaugural trading day in 2017.

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Q1 2020 hedge fund letters, conferences and more

U.S. In A Cryogenic State Due To COVID-19

The cloudy macroeconomic forecast need not be outlined here, COVID-19 has the USA in a near cryogenic state. Hertz may file Ch. 11 in May as 500,000 rental cars sit idle across the country. Even the daft can connect the dots with respect to the knock on effects. Used car values will fall as the ranks of the unemployed swell and many still “working for the man” do so from a distance. 30% of the gasoline usage in the US  ̶i̶s̶  used  to be attributed to commuting, for work. Things will come back gradually as shelter-in-place orders are lifted, clearly. Delinquency numbers in the auto space were not looking good in Q1 2020, before COVID-19 hit. Delinquency rates will certainly take out the previous highs of 5.27% and may well crest in the low double digits, depending on what Mnuchen and his merry men have in reserve (Cash for clunkers II, et al). Carvana does not bear the full brunt of this, they are after all in the moving business, not the storage business. Conforming loans are securitized, largely through Ally Financial (GMAC beginning with a couple of “bolt on’s”). The CRVNA ART (Auto Receivables Trust) has been used liberally, netting >$2bln in aggregate funding. A well timed follow on equity offering (13.3mm shares at $45) also raised $600 million. Survival through 2021 is not in questions, but valuation is another matter all together.

There is no “e” as in earnings with Carvana yet, this is a disruptor/unicorn after all.  Price to book is 157x. Profitability was slated for as soon as 2023, on the pre C-19 glide path.

Carvana Co's FICO score

The flashy, impressive Carvana car vending machines may not have their buttons pressed for some time. Great marketing for certain and might even make the Idiocracy II sequel for visual effect. Adam Neuman will not be picking up his Softbank financed Cerulean 2021 McLaren at a Carvana fulfillment “vending machine”. This is exclusively a “used” car business, despite the median 71 month loan term and interest rates from 13.47-13.84% for their “prime” (FICO 635, sub-prime is < 620) rated borrowing customers. Sub-prime APR, as per their latest securitization (1st in the sub-prime category) is 19.2% (should your credit card already be maxed).  There are 24 bespoke car vending machines in operation presently and their most recent regulatory filing notes new vending machines are “on hold”. The difficult to re-purpose structures are 8 stories high and can inventory 32 cars each for a paltry 768 automotive treasures ($18,400 avg. price in 2019). LTV 101.85% (assume fees blended in). Carvana Co ’s average customer is not the typical prime FICO score customer preferred by the money center banks. 700 FICO scores can finance a new car in the low 5% range and used in the mid 5’s for reference. An $18,500 used car financed at 100% LTV for 71 months has a monthly payment of $380 for a Carvana “prime” loan, sub-prime is $440 ….. for almost 6 years. Even with extended and enhanced unemployment benefits, there is a high probability that many car payments do not get made (more than was modeled in any event) and the now discounted car comes back for eventual resale. The arms-length owners of the Auto ABS will also be affected of course, but funding avenues will narrow for Carvana and those still open will be more expensive. Financing via the bond markets unsecured would be difficult given Carvana’s CCC rating.

Of the listed car rental companies, Avis has proven more savvy to date, building a war chest through new 1st lien debt ($400mm 5 year, 10.5% coupon priced at $97.00). Avis is rated B+, Tesla B3/Caa1 in comp.  Hertz ($HTZ $3.00 $434mm mkt cap) has one foot in the grave and the other on a banana peel. Lenders have given Hertz 2 weeks to figure out a viable option(s). Carl Icahn is in the mix in a big way and I think a solution will be found, one that is good for Carl, if nothing else. When GM was bailed out after the GFC it was largely to salvage the 250,000 pensioners. Hertz in comparison has 38,000 employees (few defined benefit, presumably) and Carvana has 3,900 car sales concierges, as a point of reference.

Carvana Co

I last looked at establishing a short in the used auto space in mid 2018 via $CACC (Credit Acceptance Corp) which currently sits at $314.80 with a mkt cap of $5.7bln with a 9 p/e (sub 3 price/book to boot). https://ibankcoin.com/firehorsecaper/2018/06/17/sub-prime-auto-loans-get-off-the-gas-short-via-cacc/#sthash.1Cc2E7LK.dpbs I was talked off the ledge at the time (short never established) by sage fellow Exodus members (Pelicans Room members), it should be noted.

Tremendous Growth Offer

Much of the story the Carvana “believers” lean into is the tremendous growth Carvana offers. They have doubled revenue every year for the last 6 years. Carvana is eventually hoping to sell > 2 million cars per year, heady aspirations indeed. The 2020 estimate was 255-265k prior to COVID-19, up from the 177.5k  sold in 2019. Cash flow was negative 990 million in 2019 (-280mm in 2017, the year of the IPO for reference). The other revenue drivers for Carvana, beyond 100% gross margin advances revenue are vehicle service contracts (VSC’s) and GAP (Guaranteed Asset Protection) waiver coverage (topping up insurance payout to amount owed). Management is also a questions mark for me as the Garcia clan have a checkered past (go figure, used cars to “dented” credits, Forbes Magazine seems to have the most in-depth coverage on the inter-web). Base salaries of key execs; Ernie Garcia III $885,000, Mark Jenkins, CFO $735,000, Ben Huston, COO $735,000.

Used cars in the USA have an aggregate valuation of $1.5 trillion with $1.3 trillion of debt against it and with the likely impairment going forward, at best, they now match at $1.3 trillion (on paper), negative after Carvana facilitation. JD Power reported wholesale auction value for the week ended April 12th at  -83% yoy.

Key competitors: #1 CarMax Inc. ($KMX), Group 1 Automotive ($GPI), Cars.com Inc. ($CARS).

Much of Carvana’s growth has been through expansion of their coverage markets;

Carvana Co

Note: NOT a COVID-19 chart, Carvana corporate slide; markets/penetration.

I think the curve flattens for Carvana quicker than it does for COVID-19, and would not be surprised to see their coverage platform turtle back to Q1 2019 levels and < (i.e. sub 100 from 150). Carvana has a very high short interest and many potential shorts run for the hills when the short interest exceeds 1/3 of the float, let alone 50%. Availability of borrow and the cost of same are critical factors when juggling sticks of dynamite. This appears to be priced for near perfection in the midst of a horror film, for all facets of the automotive sector. One for the watch list in any event. Uber (pun intended) bulls think that Bezos might tuck Carvana into the fold for a run at yet another critical “artery of the American consumer”, but I think Jeff would dry heave at the valuation and deem the Carvana moat puddle-like in terms of both breadth and depth. 100 key automotive hires along with some online mojo wave-ins like www.bringatrailer.com and/or Vroom and Amazon would be off to the races in the space without a Softbank/Visionfund like check being written.

No position at the time of writing in Carvana Co. Vetting a 2% “starter” short. Target price $25.00 (-75% from spot $98.00). Having a measured downside is important with some of these high flyers, just ask anyone short $BYND, $W, $SHOP,  or $PTON this week. Option based strategies to be given prime consideration. I’ll post eventual trade entry via Twitter with an update to this blog post as well.

Trade safe. Get under the hood. Analyze, reflect, size, act, & hedge.

Follow me on twitter @firehorsecaper

Regards,

Caleb Gibbons, CFA, FRM

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The Coming Of The Police State In America

The Coming Of The Police State In America

Authored by Jeffrey Tucker via The Epoch Times,

The National Guard and the State Police are now…

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The Coming Of The Police State In America

Authored by Jeffrey Tucker via The Epoch Times,

The National Guard and the State Police are now patrolling the New York City subway system in an attempt to do something about the explosion of crime. As part of this, there are bag checks and new surveillance of all passengers. No legislation, no debate, just an edict from the mayor.

Many citizens who rely on this system for transportation might welcome this. It’s a city of strict gun control, and no one knows for sure if they have the right to defend themselves. Merchants have been harassed and even arrested for trying to stop looting and pillaging in their own shops.

The message has been sent: Only the police can do this job. Whether they do it or not is another matter.

Things on the subway system have gotten crazy. If you know it well, you can manage to travel safely, but visitors to the city who take the wrong train at the wrong time are taking grave risks.

In actual fact, it’s guaranteed that this will only end in confiscating knives and other things that people carry in order to protect themselves while leaving the actual criminals even more free to prey on citizens.

The law-abiding will suffer and the criminals will grow more numerous. It will not end well.

When you step back from the details, what we have is the dawning of a genuine police state in the United States. It only starts in New York City. Where is the Guard going to be deployed next? Anywhere is possible.

If the crime is bad enough, citizens will welcome it. It must have been this way in most times and places that when the police state arrives, the people cheer.

We will all have our own stories of how this came to be. Some might begin with the passage of the Patriot Act and the establishment of the Department of Homeland Security in 2001. Some will focus on gun control and the taking away of citizens’ rights to defend themselves.

My own version of events is closer in time. It began four years ago this month with lockdowns. That’s what shattered the capacity of civil society to function in the United States. Everything that has happened since follows like one domino tumbling after another.

It goes like this:

1) lockdown,

2) loss of moral compass and spreading of loneliness and nihilism,

3) rioting resulting from citizen frustration, 4) police absent because of ideological hectoring,

5) a rise in uncontrolled immigration/refugees,

6) an epidemic of ill health from substance abuse and otherwise,

7) businesses flee the city

8) cities fall into decay, and that results in

9) more surveillance and police state.

The 10th stage is the sacking of liberty and civilization itself.

It doesn’t fall out this way at every point in history, but this seems like a solid outline of what happened in this case. Four years is a very short period of time to see all of this unfold. But it is a fact that New York City was more-or-less civilized only four years ago. No one could have predicted that it would come to this so quickly.

But once the lockdowns happened, all bets were off. Here we had a policy that most directly trampled on all freedoms that we had taken for granted. Schools, businesses, and churches were slammed shut, with various levels of enforcement. The entire workforce was divided between essential and nonessential, and there was widespread confusion about who precisely was in charge of designating and enforcing this.

It felt like martial law at the time, as if all normal civilian law had been displaced by something else. That something had to do with public health, but there was clearly more going on, because suddenly our social media posts were censored and we were being asked to do things that made no sense, such as mask up for a virus that evaded mask protection and walk in only one direction in grocery aisles.

Vast amounts of the white-collar workforce stayed home—and their kids, too—until it became too much to bear. The city became a ghost town. Most U.S. cities were the same.

As the months of disaster rolled on, the captives were let out of their houses for the summer in order to protest racism but no other reason. As a way of excusing this, the same public health authorities said that racism was a virus as bad as COVID-19, so therefore it was permitted.

The protests had turned to riots in many cities, and the police were being defunded and discouraged to do anything about the problem. Citizens watched in horror as downtowns burned and drug-crazed freaks took over whole sections of cities. It was like every standard of decency had been zapped out of an entire swath of the population.

Meanwhile, large checks were arriving in people’s bank accounts, defying every normal economic expectation. How could people not be working and get their bank accounts more flush with cash than ever? There was a new law that didn’t even require that people pay rent. How weird was that? Even student loans didn’t need to be paid.

By the fall, recess from lockdown was over and everyone was told to go home again. But this time they had a job to do: They were supposed to vote. Not at the polling places, because going there would only spread germs, or so the media said. When the voting results finally came in, it was the absentee ballots that swung the election in favor of the opposition party that actually wanted more lockdowns and eventually pushed vaccine mandates on the whole population.

The new party in control took note of the large population movements out of cities and states that they controlled. This would have a large effect on voting patterns in the future. But they had a plan. They would open the borders to millions of people in the guise of caring for refugees. These new warm bodies would become voters in time and certainly count on the census when it came time to reapportion political power.

Meanwhile, the native population had begun to swim in ill health from substance abuse, widespread depression, and demoralization, plus vaccine injury. This increased dependency on the very institutions that had caused the problem in the first place: the medical/scientific establishment.

The rise of crime drove the small businesses out of the city. They had barely survived the lockdowns, but they certainly could not survive the crime epidemic. This undermined the tax base of the city and allowed the criminals to take further control.

The same cities became sanctuaries for the waves of migrants sacking the country, and partisan mayors actually used tax dollars to house these invaders in high-end hotels in the name of having compassion for the stranger. Citizens were pushed out to make way for rampaging migrant hordes, as incredible as this seems.

But with that, of course, crime rose ever further, inciting citizen anger and providing a pretext to bring in the police state in the form of the National Guard, now tasked with cracking down on crime in the transportation system.

What’s the next step? It’s probably already here: mass surveillance and censorship, plus ever-expanding police power. This will be accompanied by further population movements, as those with the means to do so flee the city and even the country and leave it for everyone else to suffer.

As I tell the story, all of this seems inevitable. It is not. It could have been stopped at any point. A wise and prudent political leadership could have admitted the error from the beginning and called on the country to rediscover freedom, decency, and the difference between right and wrong. But ego and pride stopped that from happening, and we are left with the consequences.

The government grows ever bigger and civil society ever less capable of managing itself in large urban centers. Disaster is unfolding in real time, mitigated only by a rising stock market and a financial system that has yet to fall apart completely.

Are we at the middle stages of total collapse, or at the point where the population and people in leadership positions wise up and decide to put an end to the downward slide? It’s hard to know. But this much we do know: There is a growing pocket of resistance out there that is fed up and refuses to sit by and watch this great country be sacked and taken over by everything it was set up to prevent.

Tyler Durden Sat, 03/09/2024 - 16:20

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Low Iron Levels In Blood Could Trigger Long COVID: Study

Low Iron Levels In Blood Could Trigger Long COVID: Study

Authored by Amie Dahnke via The Epoch Times (emphasis ours),

People with inadequate…

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Low Iron Levels In Blood Could Trigger Long COVID: Study

Authored by Amie Dahnke via The Epoch Times (emphasis ours),

People with inadequate iron levels in their blood due to a COVID-19 infection could be at greater risk of long COVID.

(Shutterstock)

A new study indicates that problems with iron levels in the bloodstream likely trigger chronic inflammation and other conditions associated with the post-COVID phenomenon. The findings, published on March 1 in Nature Immunology, could offer new ways to treat or prevent the condition.

Long COVID Patients Have Low Iron Levels

Researchers at the University of Cambridge pinpointed low iron as a potential link to long-COVID symptoms thanks to a study they initiated shortly after the start of the pandemic. They recruited people who tested positive for the virus to provide blood samples for analysis over a year, which allowed the researchers to look for post-infection changes in the blood. The researchers looked at 214 samples and found that 45 percent of patients reported symptoms of long COVID that lasted between three and 10 months.

In analyzing the blood samples, the research team noticed that people experiencing long COVID had low iron levels, contributing to anemia and low red blood cell production, just two weeks after they were diagnosed with COVID-19. This was true for patients regardless of age, sex, or the initial severity of their infection.

According to one of the study co-authors, the removal of iron from the bloodstream is a natural process and defense mechanism of the body.

But it can jeopardize a person’s recovery.

When the body has an infection, it responds by removing iron from the bloodstream. This protects us from potentially lethal bacteria that capture the iron in the bloodstream and grow rapidly. It’s an evolutionary response that redistributes iron in the body, and the blood plasma becomes an iron desert,” University of Oxford professor Hal Drakesmith said in a press release. “However, if this goes on for a long time, there is less iron for red blood cells, so oxygen is transported less efficiently affecting metabolism and energy production, and for white blood cells, which need iron to work properly. The protective mechanism ends up becoming a problem.”

The research team believes that consistently low iron levels could explain why individuals with long COVID continue to experience fatigue and difficulty exercising. As such, the researchers suggested iron supplementation to help regulate and prevent the often debilitating symptoms associated with long COVID.

It isn’t necessarily the case that individuals don’t have enough iron in their body, it’s just that it’s trapped in the wrong place,” Aimee Hanson, a postdoctoral researcher at the University of Cambridge who worked on the study, said in the press release. “What we need is a way to remobilize the iron and pull it back into the bloodstream, where it becomes more useful to the red blood cells.”

The research team pointed out that iron supplementation isn’t always straightforward. Achieving the right level of iron varies from person to person. Too much iron can cause stomach issues, ranging from constipation, nausea, and abdominal pain to gastritis and gastric lesions.

1 in 5 Still Affected by Long COVID

COVID-19 has affected nearly 40 percent of Americans, with one in five of those still suffering from symptoms of long COVID, according to the U.S. Centers for Disease Control and Prevention (CDC). Long COVID is marked by health issues that continue at least four weeks after an individual was initially diagnosed with COVID-19. Symptoms can last for days, weeks, months, or years and may include fatigue, cough or chest pain, headache, brain fog, depression or anxiety, digestive issues, and joint or muscle pain.

Tyler Durden Sat, 03/09/2024 - 12:50

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February Employment Situation

By Paul Gomme and Peter Rupert The establishment data from the BLS showed a 275,000 increase in payroll employment for February, outpacing the 230,000…

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By Paul Gomme and Peter Rupert

The establishment data from the BLS showed a 275,000 increase in payroll employment for February, outpacing the 230,000 average over the previous 12 months. The payroll data for January and December were revised down by a total of 167,000. The private sector added 223,000 new jobs, the largest gain since May of last year.

Temporary help services employment continues a steep decline after a sharp post-pandemic rise.

Average hours of work increased from 34.2 to 34.3. The increase, along with the 223,000 private employment increase led to a hefty increase in total hours of 5.6% at an annualized rate, also the largest increase since May of last year.

The establishment report, once again, beat “expectations;” the WSJ survey of economists was 198,000. Other than the downward revisions, mentioned above, another bit of negative news was a smallish increase in wage growth, from $34.52 to $34.57.

The household survey shows that the labor force increased 150,000, a drop in employment of 184,000 and an increase in the number of unemployed persons of 334,000. The labor force participation rate held steady at 62.5, the employment to population ratio decreased from 60.2 to 60.1 and the unemployment rate increased from 3.66 to 3.86. Remember that the unemployment rate is the number of unemployed relative to the labor force (the number employed plus the number unemployed). Consequently, the unemployment rate can go up if the number of unemployed rises holding fixed the labor force, or if the labor force shrinks holding the number unemployed unchanged. An increase in the unemployment rate is not necessarily a bad thing: it may reflect a strong labor market drawing “marginally attached” individuals from outside the labor force. Indeed, there was a 96,000 decline in those workers.

Earlier in the week, the BLS announced JOLTS (Job Openings and Labor Turnover Survey) data for January. There isn’t much to report here as the job openings changed little at 8.9 million, the number of hires and total separations were little changed at 5.7 million and 5.3 million, respectively.

As has been the case for the last couple of years, the number of job openings remains higher than the number of unemployed persons.

Also earlier in the week the BLS announced that productivity increased 3.2% in the 4th quarter with output rising 3.5% and hours of work rising 0.3%.

The bottom line is that the labor market continues its surprisingly (to some) strong performance, once again proving stronger than many had expected. This strength makes it difficult to justify any interest rate cuts soon, particularly given the recent inflation spike.

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