3 July 2012 – The Aleph Blog

On Power Outages

Posted on 3 July 2012 by David Merkel

I want to toss out an idea for comment regarding power outages.? In the present storm, my power was restored within two days.? The? last time in August/September 2o11, it took almost seven days.

When large disasters occur, utilities bid for the services of power crews that are out of the area.? There should be some incentive to make them bid aggressively for additional power crews.

Here is my incentive:

Those not restored in 3 full days get one month of free electricity.
Those not restored in 5 full days get three months of free electricity.
Those not restored in 7 full days get one year of free electricity.

The idea is threefold:

The utilities pay in their own product, thus softening the blow on them.
As time progresses, the costs/inconveniences mount for those without power; this gives companies an incentive to bid for power crews, because the longer people are without power, the greater the future revenue loss.
The results of the penalty get delivered to those most inconvenienced, and in a way that is fitting — you might even have some people smiling as they sit in the dark, knowing that their reward builds exponentially as they wait.

I like this idea, because it is a minimalist way of giving incentives to the utilities to restore service.? In both this disaster and the one last August/September, my local utility said, “We are doing all that we can.”? Nonsense.? Other utilities were more aggressive in bidding for power crews.

Comments are welcome.? This idea is just a rough stab, but I think it would go a long way toward restoring equity to those that are most inconvenienced be power outages.

PS — As an aside, as the internet has become more important in the lives of people, and even more the mobile internet, it is fascinating to watch how people seek out opportunities to charge up or log in as the crisis progresses, much as they would seek out ice, nonperishable food, and other necessities as the crisis progresses.

The Rules, Part XXXIII

Posted on 3 July 201220 June 2017 by David Merkel

When politicians don?t have answers, they blame speculators, financiers (Wall Street), or foreigners.? They do anything to take the spotlight off their culpability or ineptitude.

The above saying is similar to the idea that when a company blames short sellers, it is usually a sign that the short sellers are right, and the company is mismanaged.? Think about it: when a short seller builds a short position, someone else is building a long position.? The borrowed shares that are sold have to be sold to someone.? Also note that the shorting does not change the cash flows of the company.? Even the dividends don?t change because the shorts pay dividends to the extra shares.

The shorting is a side bet on a greater question: will the company be able to produce free cash flow adequate to justify the current stock price?

What applies to companies also applies to nations.? During a debt crisis or a currency crisis, there will be an appeal against speculators that are shorting the debt.? Well, guess what, for every unit of debt shorted, there is another party buying the debt.? This applies to credit default swaps as well ? on the other side of the trade there is a guy saying, ?What a nice yield.?

The politicians complain, but they could fight back: they could buy in their debts and squeeze the shorts.? What?s that, you say?? If they did that, they would either have to raise taxes or cut programs?? And that is anathema?? Well, then the shorts aren?t to blame.? The government is to blame; it has made its own bed, let them sleep in it.

After all, shorts target companies that are mismanaged; they have no free cash flow, and can?t fight back.? The same for nations that are mismanaged; they have structural budget deficits, and a political culture that won?t change it.? No surprise that the shorts show up.

The shorts don?t change anything; they recognize a fundamentally weak situation, and locate a stock lender and a dumb buyer.? Same thing for a bond lender, and a dumb buyer as far as countries or deeply distressed companies are concerned.? And all of this can occur via derivatives if this is the best manner of doing the trade.

In the end, only free cash flows matter, and companies with large free cash flow never have to worry about the shorts.? Same for nations that have their budgets in accrual balance.