At the end of last quarter, ACAS had repaid its debt to $1.642B (for a Debt:Equity ratio of 0.4:1) and held cash of $186m. Of that, ACAS has spent $40m buying 2m shares of its newly-public managed fund, MTGE. This leaves $146m, plus whatever it's generating from businesses.
Since ACAS hasn't been snapping up new companies – it's made a few add-on investments in existing portfolio companies and invested in its own subsidiary's IPO and paid down debt – one wonders what exactly ACAS is doing with its brainpower and assets. Holding pat shows confidence, but what about the thesis that economic chaos brings opportunity and that careful investment should pay huge rewards? One has to invest to get that, right?
The Jaded Consumer has a few ideas.
Share Buyback (Or Not)
First, there's been a bit of excitement over the fact that immediately following ACAS' announcement of a NAV exceeding $13, ACAS took a plunge with the rest of the market. ACAS could retire more than 10% of its shares – buying below NAV, thus driving up the assets per share dramatically – and still not run out of cash on hand. A no-brainer, right?
Look at the history. When ACAS' share price was slammed following the Panic of '08, ACAS didn't buy underpriced shares, it bought (to retire) its own underpriced debt. Buying shares doesn't lead to realized gains (imagine if it could treat issuance as a short, and close the positions it opened north of $40!), and offers no benefit to the bottom line. On a per-share basis, it is helpful; but it does nothing for the enterprise. In effect, paying people to retire their shares shrinks the company. As a BDC with aspirations to become a larger asset manager, one of the last things ACAS wants to do is to shrink the company. And look at the other side of the coin: if ACAS thought it worthwhile to issue shares to Paulson at $5.06 so recently, how could it pay a premium of over 50% to get those same shares back?
ACAS has faced below-NAV share price opportunities before. Years ago, before ACAS took ECAS private, analysts asked why ACAS would not use share buybacks to increase value. ECAS had traded below NAV from its inception, and anyone with a blank envelope-back could tell that buying ECAS shares below NAV would increase ACAS' stake in a valuable company with a steady dividend (both companies had to that point paid uninterrupted dividends). ACAS' reply was clear: ACAS was looking to grow its business, to grow ECAS, and to broaden ownership of ECAS in support of its plan to grow the whole enterprise. ACAS had no intention of reducing the size of its enterprise or of its assets under management.
But, the astute reader is surely pointing at the Jaded Consumer and laughing: that analysis is surely wrong, or outdated, or else ACAS would not have bought every share of ECAS when it took the firm private. Surely, something is missing, no? Alas, the explanation shows that nothing has changed.
ACAS did buy ECAS, but the ECAS shares were bought with ACAS shares, not with cash. The transaction did nothing to reduce the size of the enterprise. Because ECAS' discount was greater than ACAS' discount, the below-NAV issuance of ACAS to ECAS holders was accretive to ACAS. Yet, when the dust settled, no shareholders had been paid to stop being shareholders. They just held ACAS shares instead of ECAS shares.
Management Plans Massive Recapitalization
ACAS never wanted to have secured lenders. ACAS fought giving lenders a security interest in its portfolio like there was no tomorrow, and even as it was discussing the new debt agreement on quarterly calls, was already discussing plans to restructure debt to avoid having debt that doesn't move with the markets and exposing ACAS to leverage scares. ACAS wants out of its secured loans. If one recalls, ACAS built up cash during the aftermath of the Panic of '08 – eventually holding over a billion smackers while cash was king and hugely profitable mispriced-investment opportunities lay about the land like stranded fish after a receding tsunami. ACAS is once more quite possibly working on a strategy to address its capital structure issues – to obtain more flexibility than permitted under its agreements with its secured creditors – that will require money.
I don't think ACAS will be retiring equity.
What I dearly hope is that, if ACAS is foregoing panic-selling opportunities that offer decent companies at awful-company prices, its strategy for its cash is really slick. What is ACAS' distressed-opportunity team (the special situations group, mentioned here) doing, anyway? My principal thesis in ACAS is that illiquid privately-held companies trade in an inefficient market in which ACAS has opportunities to buy deals that just don't exist in efficient markets. If ACAS doesn't buy something with its money, what's it doing?
Friday, August 19, 2011
Thursday, August 18, 2011
HP Kills Its Tablet, Looks to Exit PCs
Despite beating Dell at the commodity PC game, HP has killed its TouchPad product and is looking to exit the PC business altogether to focus on higher-margin business (enterprise hardware, services, etc.). With WebOS gone from the mobile market, Apple's platform has fewer competitors, though Google is left (and Microsoft; but partnering with Microsoft can work out differently than expected, and even proving MSFT wrong won't lead to any contrition).
Who will be left to make a quality product?
In news from the other side of the globe, Apple has passed Lenovo in share of the China market (in sales; but remember, unit share isn't profit share). In mobile computers, DisplaySearch reckons that iPads are notebook computers and on that basis concluded that Apple became the worldwide leader in notebook unit volume during the second quarter of 2011 and in that quarter sold just more than 1 of every 5 notebooks sold worldwide. To the extent that platform market share reflects its "stickiness" and serves as a competitive advantage, Apple may have a real and growing platform advantage not just from hipness, but from the virtuous cycle of customers and developer resources being attracted to one another.
Who will be left to make a quality product?
In news from the other side of the globe, Apple has passed Lenovo in share of the China market (in sales; but remember, unit share isn't profit share). In mobile computers, DisplaySearch reckons that iPads are notebook computers and on that basis concluded that Apple became the worldwide leader in notebook unit volume during the second quarter of 2011 and in that quarter sold just more than 1 of every 5 notebooks sold worldwide. To the extent that platform market share reflects its "stickiness" and serves as a competitive advantage, Apple may have a real and growing platform advantage not just from hipness, but from the virtuous cycle of customers and developer resources being attracted to one another.
Monday, August 15, 2011
MSFT Abandons Another Market Niche (eBooks)
After dumping its Zune music player product and its Kin phone hardware, it shouldn't be a surprise to see Microsoft closing down its e-Book reader. Amazon and Apple seem to have sewn up that market, and Microsoft hasn't bothered to invest in any significant competition.
At least with the Zune, MSFT tried to create both a music marketplace and a sense of buzz. The e-Book platform seems to have been launched in an expectation that because Microsoft did it, everyone would accept it as a standard, and it would naturally succeed due to fear of competition. This sort of reasoning certainly can't have much currency after the fading of wma-encrypted DRM music as a "standard" just because MSFT was selling it.
MSFT seems to be concentrating on a smaller number of core platforms and software where it's still competing: operating systems for desktop, notebook, and phone hardware; and software for its platforms (either to run on the platforms, or to support them on the back-end). Microsoft's server products have significant revenue – Exchange and IIS are major back-end products licensed at great expense by major corporations – but Netcraft's current web server graphs show that Microsoft's competition from free competition may be denying it share in the growing market even as Microsoft's revenue continues to be rich. (MSFT had once a share approaching 40% of the web server market, but MSFT's IIS now appears to have less than 20% of the web server market and is losing share. Among the million busiest sites, Microsoft's share has been less volatile but is on a steady decline.) The effect of free software's increasing capability on Microsoft's licensing outlook will turn on things like Microsoft's ability to make use of third-party tools seem burdensome and hostile to users and administrators. Microsoft's ability to do this with impunity will turn in some part on the availability of alternatives to Outlook, which customers typically use to access mail, calendar, and contact information for which Microsoft offers back-end management through its Exchange product.
If anyone has information on email server share that might offer for mailservers what Netcraft offers for web servers, I'd love to see that data.
At least with the Zune, MSFT tried to create both a music marketplace and a sense of buzz. The e-Book platform seems to have been launched in an expectation that because Microsoft did it, everyone would accept it as a standard, and it would naturally succeed due to fear of competition. This sort of reasoning certainly can't have much currency after the fading of wma-encrypted DRM music as a "standard" just because MSFT was selling it.
MSFT seems to be concentrating on a smaller number of core platforms and software where it's still competing: operating systems for desktop, notebook, and phone hardware; and software for its platforms (either to run on the platforms, or to support them on the back-end). Microsoft's server products have significant revenue – Exchange and IIS are major back-end products licensed at great expense by major corporations – but Netcraft's current web server graphs show that Microsoft's competition from free competition may be denying it share in the growing market even as Microsoft's revenue continues to be rich. (MSFT had once a share approaching 40% of the web server market, but MSFT's IIS now appears to have less than 20% of the web server market and is losing share. Among the million busiest sites, Microsoft's share has been less volatile but is on a steady decline.) The effect of free software's increasing capability on Microsoft's licensing outlook will turn on things like Microsoft's ability to make use of third-party tools seem burdensome and hostile to users and administrators. Microsoft's ability to do this with impunity will turn in some part on the availability of alternatives to Outlook, which customers typically use to access mail, calendar, and contact information for which Microsoft offers back-end management through its Exchange product.
If anyone has information on email server share that might offer for mailservers what Netcraft offers for web servers, I'd love to see that data.
Sunday, August 14, 2011
Only 0.01% Wrong?
As a computer hobbyist, the Jaded Consumer is interested in software projects and thus particularly fond of high-quality open-source software projects. Consequently, I was very interested to read that Daniel Hartmeier reported his automated spam solution had achieved a 99.5% accuracy rate in identifying spam, while only losing 0.01% of legitimate emails to false-positive assignment of "spam" status. As it happens, I am not currently running a mailserver outside my own LAN, so I have little current need for this sort of solution – but I have clients, and I read explanations like his to understand what sorts of solutions can be offered to people who don't want to spend thousands on commercial solutions.
Honestly, though, email is becoming like phone service: you don't run your own cable and tap out your own Morse any more, you pick one of a field of commodity vendors and use the service (including any offered spam control) until you decide you like another better. You usually get email service bundled with an Internet connection; there's really little purpose for many businesses to bother with their own email back-ends unless the business is large enough that in-house handling makes better economic sense for handling the business' particular security concerns. Not that all these big businesses get it right, mind you, but ....
But I didn't try to email Daniel Hartmeier about his spam solution. Instead, I emailed him about pf. The page that leads with the word "History" was last updated in 2006, and there's been a recent development in the availability of pf. As of the launch of MacOS X v.10.7 ("Lion"), the firewall originated by Daniel Hartmeier following the removal of IPFilter from the OpenBSD code repository in May of 2001. I thought I'd point out that – although the fact hadn't been advertised – the world's highest-volume Unix distribution now contained the firewall Daniel originated began some ten years ago.
So I sent Daniel an email showing that pf-specific virtual devices were present in the default installation of MacOS X "Lion". What I got back wasn't what I expected:
But on that firewall -- congratulations, Daniel Hartmeier, on an excellent product. It's rocked for years, and I'm pleased it's come to my own desktop. Thanks for everything.
Honestly, though, email is becoming like phone service: you don't run your own cable and tap out your own Morse any more, you pick one of a field of commodity vendors and use the service (including any offered spam control) until you decide you like another better. You usually get email service bundled with an Internet connection; there's really little purpose for many businesses to bother with their own email back-ends unless the business is large enough that in-house handling makes better economic sense for handling the business' particular security concerns. Not that all these big businesses get it right, mind you, but ....
But I didn't try to email Daniel Hartmeier about his spam solution. Instead, I emailed him about pf. The page that leads with the word "History" was last updated in 2006, and there's been a recent development in the availability of pf. As of the launch of MacOS X v.10.7 ("Lion"), the firewall originated by Daniel Hartmeier following the removal of IPFilter from the OpenBSD code repository in May of 2001. I thought I'd point out that – although the fact hadn't been advertised – the world's highest-volume Unix distribution now contained the firewall Daniel originated began some ten years ago.
So I sent Daniel an email showing that pf-specific virtual devices were present in the default installation of MacOS X "Lion". What I got back wasn't what I expected:
A message that you sent could not be delivered to one or more of its recipients. This is a permanent error. The following address(es) failed:I thought the problem might be that I was using a return email address that didn't come from the domain where the mailserver was located. I sent it again from another email address, using the mailserver of the email address' own domain. I got:
daniel@benzedrine.cx
SMTP error from remote mail server after end of data:
host insomnia.benzedrine.cx [213.3.30.106]: 554 5.7.1 Spam (score 3.5)
Google tried to deliver your message, but it was rejected by the recipient domain. We recommend contacting the other email provider for further information about the cause of this error. The error that the other server returned was: 554 554 5.7.1 Spam (score 3.5) (state 18).One of my other tries got a totally different failure. I even tried re-writing my email so that its text might be less apt to trigger a Bayesian spam filter set to trigger on something in my prior email; but to no avail. I suppose the lesson is this: Daniel's excellent firewall tool may be everything one might dream (correctly coded, fast, feature-rich, elegant to configure, etc.) but this doesn't mean I can easily accept his claim that he's stopping 99.5% of the spam with a 0.01% false-positive rate. For information about stopping spam successfully, I'll be reading further.
But on that firewall -- congratulations, Daniel Hartmeier, on an excellent product. It's rocked for years, and I'm pleased it's come to my own desktop. Thanks for everything.
Saturday, August 13, 2011
China: Another Debt Bubble?
Although the national government of China is famously a net creditor with substantial sovereign investment assets, the national government in China isn't the only government in China. Closer to where the rubber meets the road, municipal governments stand responsible for building numerous infrastructure and even housing projects. Local government units in China are restricted in their fundraising. As a result, the frauds that are commonplace everywhere else in China (from fake Apple Stores to fake infant formula, nothing appears too sacred to defile) are equally common in government funding schemes.
In one example, Loudi raised infrastructure development funds with municipal bonds fully secured by numerous tracts of developed land. The problem? To secure the huge bond issue, the land – located in a place you've never heard, with an annual household income less than $2,500 and severe under-occupancy of existing housing – is given a fictitious value commensurate with fully-occupied Chicago suburbs with an average annual household income exceeding $250,000. And based on this Bloomberg report, payment on the bonds requires the claimed land values to go up.
Chinese rating agencies, unsurprisingly, are as easily motivated by politics and favor-trading as by financial reasoning. Ratings on the Loudi bonds range from junk status to one step above U.S. Treasury obligations. According to Moody's, the aggregate local government debt in China is understated by Chinese state auditors by 3.5 trillion yuan – reflecting the murkily unclear status of local debt issuance and whether some of the off-balance-sheet local government fundraising schemes even constitute enforceable obligations. To the extent that Chinese banks are debt holders, the safety of Chinese banks may be in jeopardy. To the extent that official Chinese debt accounting is off by as much as 25%, the reliability of Chinese financial reports is gravely in doubt.
Local Chinese debt may not look very big from the U.S – a mere couple trillion bucks – but they haven't been working to build it up very long, they have no apparent checks in place to prevent issuance scams, and they're working with the central government to issue more. CNBC's John Carney asks an interesting question: if the entire GDP of China has yet to reach $5 trillion when its debt exceeds $2 trillion, what should we conclude about the strength of the economy that's producing China's current output? (For comparison, the U.S. GDP exceeds $14 trillion, and its debt has been accumulating for decades at the local, state, and federal level until it presently exceeds $17 trillion. But the U.S. economy isn't rumored to have been on fire these last few years as the Chinese economy has been reputed.)
Asian study of American business strategies didn't end with the adoption of mass production facilities, did it?
In one example, Loudi raised infrastructure development funds with municipal bonds fully secured by numerous tracts of developed land. The problem? To secure the huge bond issue, the land – located in a place you've never heard, with an annual household income less than $2,500 and severe under-occupancy of existing housing – is given a fictitious value commensurate with fully-occupied Chicago suburbs with an average annual household income exceeding $250,000. And based on this Bloomberg report, payment on the bonds requires the claimed land values to go up.
Chinese rating agencies, unsurprisingly, are as easily motivated by politics and favor-trading as by financial reasoning. Ratings on the Loudi bonds range from junk status to one step above U.S. Treasury obligations. According to Moody's, the aggregate local government debt in China is understated by Chinese state auditors by 3.5 trillion yuan – reflecting the murkily unclear status of local debt issuance and whether some of the off-balance-sheet local government fundraising schemes even constitute enforceable obligations. To the extent that Chinese banks are debt holders, the safety of Chinese banks may be in jeopardy. To the extent that official Chinese debt accounting is off by as much as 25%, the reliability of Chinese financial reports is gravely in doubt.
Local Chinese debt may not look very big from the U.S – a mere couple trillion bucks – but they haven't been working to build it up very long, they have no apparent checks in place to prevent issuance scams, and they're working with the central government to issue more. CNBC's John Carney asks an interesting question: if the entire GDP of China has yet to reach $5 trillion when its debt exceeds $2 trillion, what should we conclude about the strength of the economy that's producing China's current output? (For comparison, the U.S. GDP exceeds $14 trillion, and its debt has been accumulating for decades at the local, state, and federal level until it presently exceeds $17 trillion. But the U.S. economy isn't rumored to have been on fire these last few years as the Chinese economy has been reputed.)
Asian study of American business strategies didn't end with the adoption of mass production facilities, did it?
Wednesday, August 10, 2011
"Racehorse" Haynes Was Right About The Old-Woman's Car
Over ten years ago I climbed out from behind a 1982 Mercedes 240-D – a two-ton Diesel sedan with four cylinders, no turbocharger, and acceleration like a snail heading up a wall. But it was reliable.* There, steps from the old Diesel, I met Richard "Racehorse" Haynes. We talked cars for a few minutes while approaching the auditorium that was our destination.
"I used to have a Mercedes," he said. An 8-cylinder S-Class coupe, as it turned out.
But ... used to? Why'd he get rid of it?
The answer was quick and clear: Mercedes makes "an old woman's car."
Fond of my own (admittedly sluggish) Mercedes, and having no firsthand experience with the Porsche with which he currently drove, I didn't have any particular argument to raise. We changed subjects: law. And given I was speaking to "Racehorse" Haynes, that conversation was amusing in its own right – but that's a different story. This tale is about the old woman's car.
The Old Woman's Car
Being a huge fan of my old Diesel, I was excited when Mercedes in 2004 returned to selling a Diesel sedan in the North American market. I bought a 2005 E320CDI the very summer it launched. I won't go into detail how my neighbors thought I had joined a car-of-the-month club (due to the machine being at the dealer's so frequently for unexpected service), or how little plastic parts in the shoulder belt assembly buzzed near my ear when I drove while trying to listen to the huge-priced sound system, or even how the car left me stranded repeatedly due to unexpected complete failure. And I won't go into the oft-imitated abomination that is the headrest, which forces one's head more than an inch forward of one's shoulders so one can't relax in the passenger seat (the E-class luxury seat had such awful ergonomics that L, who has significant anatomical and ergonomic training, preferred to ride in C-class Mercedes seats). I will just talk about the lag and sag of Mercedes' old-woman's car.
First: the lag. The 2005 E320 CDI did not offer 4-Matic. Two-wheel drive was the only option. So, when road conditions require harsh acceleration (e.g., a right angle on a road that winds so you can't see approaching traffic from either direction), great care was needed to obtain the best acceleration one could without pushing the rear wheels to the point of spinning out, then being called into check by the anti-skid system. But this was impossible due to old-woman's car lag.
Performance
Mercedes' vehicles are very carefully engineered – I asked high-end Mercedes-only mechanics' shops about solutions and learned that the problem exists all the way up to 12-cylinder sport coupe models, some of whose drivers had actually sold their hot rides in disgust over the issue – to wait a half-second before responding to the accelerator. Now, how long is a half-second? When you are carefully applying the accelerator searching for the most juice you can safely give the car in order to traverse a curved road with mere yards of visibility, and do so without losing control of the car to a rear-wheel spinout, you push until you feel the car is doing everything you need and then you let off so you can stop accelerating on the other side of the road. Unfortunately, the half-second lag means that you get nothing as you push, so you push a bit more, and a bit more, and by the time the car starts responding you have no idea what depth of accelerator push is having what effect on the car but by the time the car starts turning the rear wheels it's not moving at all, because they've leapt past the limits of their traction in a way no car ever behaved, even when driving a 440-cubic-inch engine in a car at least as heavy, and you've lost control of the Mercedes to a computer that is flashing a triangular warning with an exclamation point in it -- warning that the car's traction control system has overtaken the wheels.
And this isn't the scary part. Embarrassing yourself while burning rubber off your tires in public probably is bad enough, but its not the depth of this bad. No. The worst is that you are still at a stop sign, perpendicular to a curved road with mere yards of visibility along a road with a 35mph speed limit, but instead of being safely behind the stop sign waiting until it looks clear both ways you are now well into the southbound lane, moving about 2mph, with a flashing exclamation point to tell you that you're not yet in control of the Mercedes' acceleration.
In the ancient Mercury Grand Marquis, this never happened because the accelerator pedal mecahnically pulled a carburator valve, causing immediate power transfer to the rear wheels; you knew precisely what amount of push caused what acceleration because you felt it just as it happened, enabling instantaneous and intuitive adjustment to ensure you got just enough, not too much, and had complete control. But don't blame the computers. Mercedes' brake system makes hundreds of adjustments each second to prevent wheel lock-up during braking (as did the 1991 Lincoln Towncar, with its fuel-injected V-8, even more powerful than the Grand Marquis!), and could in the hands of a competent engineer solve all the same problems with acceleration.
But Mercedes doesn't want you to have controlled acceleration. Mercedes is an old woman's car. Mercedes only cares about stopping. Even when you buy a 4-wheel-drive Mercedes, you don't get 4-wheel acceleration every time you punch it -- you get two wheels until Mercedes thinks traction is failing, then you get a reactive switch into 4-wheel mode, which lasts only so long as Mercedes thinks you need it. I haven't bothered to test whether Mercedes' 4-Matic products are any better about getting across this intersection, but I've found the answer and it's such an elegant, fun answer there's little point to making excuses for Mercedes' broken products.
And a half-second delay in acceleration is broken. It robs drivers of control. It strands them at 2mph half into a lane of traffic that cannot be vetted for safety because the foliage and curving road make a pipe dream out of visibility in any conditions but night, when headlights might warn of traffic by illuminating the opposite side of the road from oncoming traffic. And rush hour is nowhere near nighttime. The half-second isn't required by any computer system, but is a direct result of a computer system that is buggy, sickeningly buggy, and probably drove my stroke risk several-fold before the vehicle finally convinced me it needed replacement.
Reliability
Mind you, the Mercedes didn't suck from bumper to bumper. The engine was a thing of beauty, pumping out ample power from six cylinders of twin-turbocharged Diesel engine. The power would have been much more appreciated, especially at the low end where Diesels have so much torque, if the accelerator lag didn't make it basically uncontrollable unless you drove like you were on your way to Church on Sunday along roads marked only with high-visibility stoplights as traffic signals, so you could trust that at every intersection it didn't matter when you moved or how quickly because you relied implicitly on the safety created by your legal right-of-way. God forbid that some municipality install a stop-sign that required you to wait until judgment and observation were required to assess safety, or that the stop was anything but an all-way stop.
The power of the engine could be felt not only in the acceleration, control of which was usurped by computers whenever lag made it impossible for a human to assess, but even driving. For example, one day I felt a vibration akin to a rumble-strip while slowing to a stop on a freeway access road. I checked, and I was nowhere near the road edge. But as I slowed, so did the frequency of the rumble, until at idle it was a slow procession of little bumps. The light changed and I touched the accelerator -- and felt the pace of the rumble strips speed.
I've seen cars that had plastic bits hanging into their wheel wells, and I've seen cars dragging parts, and I've seen all kinds of things. And this particular car had been in the shop so often with weird and intractable suspension issues that caused all kinds of clicks, bumps, and other strange noises and feelings that I frankly could imagine just about anything. Within a half mile, I had to stop: the vibration became so heinous, and the noise so awful, that I could not be reassured by the voice on the tele-aid system that there was no problem. There was a serious problem, and it was getting worse. I will save you the troubleshooting nightmare and cut to the chase: two of the engine's three (sophisticated, vibration-isolating, liquid-filled) engine mounts had failed. Basically, the engine was being held up from falling into the street by forces being exerted on the transmission. Without warranty, the repair would have been thousands of dollars. This was at about 50K mi, when factory warranty would have just expired. They say extended warranties are not a good buy, but let me tell you: don't own a recent Mercedes without one.
Undrivability didn't require 50k miles to materialize, though. Before 1K, the thing died within a block of home with no explanation, and I found myself pushing it backward out of the intersection in which it had halted. Mercedez-Benz of Greenway Plaza carefully inspected the car and pronounced it cured, but when I went to pick it up, it died the exact same way on the valet. Apparently, dealer-added security technology didn't play well with at least some of the car's numerous built-in computers, which went on strike at odd and unpredictable intervals. Eventually Greenway Mercedes removed the gear and replaced it with LoJack Early Warning, which I do not recommend unless for the insurance discount; it's a long story, but LoJack won't tell you where the car is, and Houston Police Department (to which LoJack will refer you if you call looking for your car when a tow driver drops it in an unknown location in Houston) will transfer you numerous times before you finally realize nobody at HPD has any way to obtain the location from LoJack, either. See, LoJack won't find it for you, only for the police; and the police expect LoJack to help you because finding your car isn't their problem and they've no idea who to call to get a car located with LoJack. But the insurance discount is real; price it, compare it to the LoJack product, and make a business decision. They will never find your car (the owner of the lot where the car is dumped will help you on the next business day), but the insurance discount will come like clockwork.
The clicking and bumping that occasioned slow turns on smooth pavement was an interesting lesson in maintenance. Either Greenway Mercedes lied about replacing all those suspension parts, or Mercedes' suspension parts are horribly short-lived. But there is a third option: Greenway Mercedes is incompetent, and misdiagnosed the problem repeatedly, replaced a part unrelated to the issue you demonstrated over and over after they said they'd fixed it, and kept charging Mercedes for warranty work. Actually fixing the problem would be to kill the goose that was laying the golden service eggs, no? Much better to run you and Mercedes in circles. But I conjecture. Other Mercedes-certified mechanics were shocked to hear the lengthy story of my suspension woes with the 2005 E320 CDI, completely disbelieved that Mercedes would build a product so frequently failing, and suggested in no uncertain terms that the folks at Greenway Mercedes might not be the biggest crooks in the country, but were probably the biggest crooks west of the Mississippi.
So I started having its many warranty problems handled by the evidently more competent technicians at Alex Rodriguez Mercedes. These gentlemen will bring you your loaner, swap you your car, and bring you yours back fixed – all on a schedule you agree in advance. You never have to sit in a waiting room, fight traffic, suffer scheduling problems and so forth just because you had the bad judgment to believe that because Mercedes could build an outstandingly reliable car in 1982, it would surely be able to build a reliable car in this century. Let me save you some trouble: they've completely forgotten how. But if you live anywhere near the Johnson Space Center – the place Man first tried to reach when it spoke those first words back from the surface of the moon and uttered the word "Houston", but which is too unimportant to be allowed to display any of the Space Shuttles it successfully guided into space and back – I urge you to rely on Alex Rodriguez Mercedes-Benz. They can't make the car more reliable, but they'll make you much happier while it's being maintained.
One fine day I made an appointment for A-Rod Mercedes (as they call themselves) to look into why my stereo had quit working. This was a pain for me; I like music, which is why I paid a fortune for a plussed-up sound system. I wasn't exactly surprised that it had failed; I'd had the "Command" system (which includes the plussed-up sound system controls) crash repeatedly, including while I was depending on it for maps in a strange town while under a deadline, and remain broken and unbooting for days at a time, but this time I was determined to show a competent** technician the problem so that it might finally be diagnosed and fixed. After years of this kind of mistreatment, I was determined to have it solved before the extended warranty ran out. So I explained that I had a non-emergency problem, I wanted a loaner, and I was scores of miles away. A-Rod Mercedes' friendly service advisers set me up with an appointment to have a loaner delivered the very next Monday – less than a week away – so they could sort it out with minimal inconvenience.
A few other things associated with the Command system died over the next couple of days. I assumed it was an expansion of the audio problem; the radio, the auxiliary input I used for an iPod, the mapping system (which has a voice component), all became unresponsive. Still, the Mercedes' broad array of potential text messages available to warn the driver about everything from upcoming maintenance to impending engine calamities lay silent, suggesting that nothing particularly critical was amiss, just another audio-related bug. So on Friday – three days before the Monday loaner dropoff appointment – I don't expect serious trouble when I get the car loaded with people for a little outing. Everybody is in the car, everybody is buckled, the garage door is open, and I move to turn the key.
Nada.
A red backlight emphasizes the message that there is a malfunction. But since it's not even trying to turn over, I know damned well there's a malfuction. And I call A-Rod, who promptly sends a flatbed to haul off the dead husk of the "powerful" Mercedes. Diagnosis? For over a week the car had been slowly shutting down "non-essential" systems out of concern over a "dying" battery. One would think that if the car were at the point of deliberately killing non-essential systems in anticipation of failure, it might send me a little note that failure was at least foreseeable. But no, I got stuck for the Nth time by the "new" Diesel, which disgusted me mostly because I had come to Mercedes' defense so many times when explaining how the "old" Diesel had withstood so much for so long. (And still does: everything but the crummy A/C system runs like a champ, and the A/C system is just hopeless because it was designed by people who live in a country where A/C is an option and not a necessity in a roadcar. New Mercedes A/C systems were designed by a team Mercedes sent to Arizona not to come back without an A/C that could be sold in the South with a straight face. So the new A/C is very powerful but assumes that it's being used in a dry desert, and so promptly fills with condensation in the swamps of coastal Texas and thereafter, following an incubation period, gives off a persistent and nasty mold smell that dealers pretend is not a systematic problem even as they cycle through a long list of imaginative fixes that plainly reflect substantial post-development engineering resources, but none of which work. Short term, your dealer can kill it with harsh treatments that leave the car smelling like a chemical plant, but long term it all just grows back.)
So I asked about this "battery failure". The Diesel has, after all, two big-assed batteries. Oh, I'm told, they both failed. Ahem. Both? At once? I'm thinking its the recharging system; one of the batteries had just been replaced less than a year before. Haha, that battery will be replaced under warranty, but the other one will be about $400. I search online, certain I can find a better price, but I can't: the online price for a comparable battery is actually worse than I am quoted by A-Rod Mercedes. The thing is huge, uses cutting-edge technology to produce enormous cold cranking amps, and just can't be had for cheap. The alternative is that I can't start my car; so I shell out, dubious about the charging system and about the battery life and about the reliability of a car that knows it's failing but chooses to keep the fact a secret even while shutting down ill-designed electronic subsystems I assumed were falling to crasher bugs I'd previously seen.
So I start looking for a different ride.
Trading Three-Point Stars for Four Rings
And let me tell you what fun that new ride is. With approximately the same engine displacement, the 6-cylinder 2008 Audi A6 Quattro*** has comparable interior room, a trunk that's vastly bigger even than the 2.5-corpse trunk of the Mercedes, and full-time four wheel drive. This is a huge win. You want to cross an intersection, the car doesn't lose traction then claw to get it back: it uses all four wheels to get you across with no perceptible loss of traction.
You are at full speed on the freeway and some nutjob thinks it's a good idea to swerve directly into you? The Mercedes was controllable at speed, to be sure. You turn the biiig leather wheel and, dampened beneath a fortune in ground-insulating suspension, the front wheels turn and lean on Mercedes' peculiar front-end control system and the car – driven against the front tires by the rear tires' answer to the call of the relentless Diesel – is pushed sideways out of harm's way while you rely on anti-skid technology to protect you from the risk of strange traction issues on the freeway. Once in your new lane, the Mercedes settles down from the swaying induced by the little duel between the turned front tires and the pushing, ever-pushing rear wheels. And then you're back in the bank vault, insulated from the world, safe.
The same incident passes quite differently in the Audi Quattro. You pull the wheel with the same force – part fear of the near-wreck, part anger at the risk caused by the idiot coming your way – and there is no swaying left-to-right, no conflict front-to-back, no post-lane-change settling-down period. You turn the wheel and the Audi doesn't grudgingly agree to change lanes only while grumbling about what an imposition it is to be asked.
Instead, the Audi leaps with excitement, thrilled to do your bidding, ecstatic that you've asked it to do something more interesting than keep straight-on between an endless series of dashed lines. The Audi's all-time four-wheel drive pulls you where you want to go, ignoring road oil, rain, debris of other cars' shredded tires and shattered fiberglass, and eagerly awaits your next command – its next fondest wish. Sure, the Diesel in the Mercedes has more torque and feels like it's got more raw power, even though the Audi's gasoline engine has much more listed horsepower, but most of us aren't in a roadrace and are unconcerned with track times. What we want is to know what it feels like.
And in the Audi, I feel in control. Not worried about unexpected equipment failures. Not worried about lag in reacting to emergency commands. Not worried that the maps will quit while I'm in a rush in a strange place. Not worried even that the buzzing of Mercedes' plastic parts signifies other overlooked details with safety and reliability implications that will bite me, hard, in the back when I am most vulnerable. In the Audi, I am not worried at all about the car failing for any reason to perform exactly as I demand. And that security, and that control, represent the kind power I care most about.
* Except the A/C. Well, that was reliable too I suppose – it reliably sucked.
** Competent technician in this circumstance means a technician qualified by the absence of any relationship to Mercedes-Benz of Greenway Plaza.
*** After the value fiasco I had with the new Mercedes, I was gun-shy about buying new. In 2004, the '05 was the only recent-generation Diesel to buy from Mercedes, and my personal history with cars was to keep them longer than a decade so I didn't really have a lot of concern about resale value. Never having owned an Audi, but liking the reliability and performance implications in a firm able to take 1st, 2nd, and 3rd in a grueling long-distance torture event like LeMans (in 2010; in 2011 they took 1st after losing their other cars to crashes while overtaking slower Ferrarris, for the tenth victory in twenve 24-hour races), I thought buying used would give me an opportunity to try one out for a few years to see it if treated me like I expect a car ought.
"I used to have a Mercedes," he said. An 8-cylinder S-Class coupe, as it turned out.
But ... used to? Why'd he get rid of it?
The answer was quick and clear: Mercedes makes "an old woman's car."
Fond of my own (admittedly sluggish) Mercedes, and having no firsthand experience with the Porsche with which he currently drove, I didn't have any particular argument to raise. We changed subjects: law. And given I was speaking to "Racehorse" Haynes, that conversation was amusing in its own right – but that's a different story. This tale is about the old woman's car.
The Old Woman's Car
Being a huge fan of my old Diesel, I was excited when Mercedes in 2004 returned to selling a Diesel sedan in the North American market. I bought a 2005 E320CDI the very summer it launched. I won't go into detail how my neighbors thought I had joined a car-of-the-month club (due to the machine being at the dealer's so frequently for unexpected service), or how little plastic parts in the shoulder belt assembly buzzed near my ear when I drove while trying to listen to the huge-priced sound system, or even how the car left me stranded repeatedly due to unexpected complete failure. And I won't go into the oft-imitated abomination that is the headrest, which forces one's head more than an inch forward of one's shoulders so one can't relax in the passenger seat (the E-class luxury seat had such awful ergonomics that L, who has significant anatomical and ergonomic training, preferred to ride in C-class Mercedes seats). I will just talk about the lag and sag of Mercedes' old-woman's car.
First: the lag. The 2005 E320 CDI did not offer 4-Matic. Two-wheel drive was the only option. So, when road conditions require harsh acceleration (e.g., a right angle on a road that winds so you can't see approaching traffic from either direction), great care was needed to obtain the best acceleration one could without pushing the rear wheels to the point of spinning out, then being called into check by the anti-skid system. But this was impossible due to old-woman's car lag.
Performance
Mercedes' vehicles are very carefully engineered – I asked high-end Mercedes-only mechanics' shops about solutions and learned that the problem exists all the way up to 12-cylinder sport coupe models, some of whose drivers had actually sold their hot rides in disgust over the issue – to wait a half-second before responding to the accelerator. Now, how long is a half-second? When you are carefully applying the accelerator searching for the most juice you can safely give the car in order to traverse a curved road with mere yards of visibility, and do so without losing control of the car to a rear-wheel spinout, you push until you feel the car is doing everything you need and then you let off so you can stop accelerating on the other side of the road. Unfortunately, the half-second lag means that you get nothing as you push, so you push a bit more, and a bit more, and by the time the car starts responding you have no idea what depth of accelerator push is having what effect on the car but by the time the car starts turning the rear wheels it's not moving at all, because they've leapt past the limits of their traction in a way no car ever behaved, even when driving a 440-cubic-inch engine in a car at least as heavy, and you've lost control of the Mercedes to a computer that is flashing a triangular warning with an exclamation point in it -- warning that the car's traction control system has overtaken the wheels.
And this isn't the scary part. Embarrassing yourself while burning rubber off your tires in public probably is bad enough, but its not the depth of this bad. No. The worst is that you are still at a stop sign, perpendicular to a curved road with mere yards of visibility along a road with a 35mph speed limit, but instead of being safely behind the stop sign waiting until it looks clear both ways you are now well into the southbound lane, moving about 2mph, with a flashing exclamation point to tell you that you're not yet in control of the Mercedes' acceleration.
In the ancient Mercury Grand Marquis, this never happened because the accelerator pedal mecahnically pulled a carburator valve, causing immediate power transfer to the rear wheels; you knew precisely what amount of push caused what acceleration because you felt it just as it happened, enabling instantaneous and intuitive adjustment to ensure you got just enough, not too much, and had complete control. But don't blame the computers. Mercedes' brake system makes hundreds of adjustments each second to prevent wheel lock-up during braking (as did the 1991 Lincoln Towncar, with its fuel-injected V-8, even more powerful than the Grand Marquis!), and could in the hands of a competent engineer solve all the same problems with acceleration.
But Mercedes doesn't want you to have controlled acceleration. Mercedes is an old woman's car. Mercedes only cares about stopping. Even when you buy a 4-wheel-drive Mercedes, you don't get 4-wheel acceleration every time you punch it -- you get two wheels until Mercedes thinks traction is failing, then you get a reactive switch into 4-wheel mode, which lasts only so long as Mercedes thinks you need it. I haven't bothered to test whether Mercedes' 4-Matic products are any better about getting across this intersection, but I've found the answer and it's such an elegant, fun answer there's little point to making excuses for Mercedes' broken products.
And a half-second delay in acceleration is broken. It robs drivers of control. It strands them at 2mph half into a lane of traffic that cannot be vetted for safety because the foliage and curving road make a pipe dream out of visibility in any conditions but night, when headlights might warn of traffic by illuminating the opposite side of the road from oncoming traffic. And rush hour is nowhere near nighttime. The half-second isn't required by any computer system, but is a direct result of a computer system that is buggy, sickeningly buggy, and probably drove my stroke risk several-fold before the vehicle finally convinced me it needed replacement.
Reliability
Mind you, the Mercedes didn't suck from bumper to bumper. The engine was a thing of beauty, pumping out ample power from six cylinders of twin-turbocharged Diesel engine. The power would have been much more appreciated, especially at the low end where Diesels have so much torque, if the accelerator lag didn't make it basically uncontrollable unless you drove like you were on your way to Church on Sunday along roads marked only with high-visibility stoplights as traffic signals, so you could trust that at every intersection it didn't matter when you moved or how quickly because you relied implicitly on the safety created by your legal right-of-way. God forbid that some municipality install a stop-sign that required you to wait until judgment and observation were required to assess safety, or that the stop was anything but an all-way stop.
The power of the engine could be felt not only in the acceleration, control of which was usurped by computers whenever lag made it impossible for a human to assess, but even driving. For example, one day I felt a vibration akin to a rumble-strip while slowing to a stop on a freeway access road. I checked, and I was nowhere near the road edge. But as I slowed, so did the frequency of the rumble, until at idle it was a slow procession of little bumps. The light changed and I touched the accelerator -- and felt the pace of the rumble strips speed.
I've seen cars that had plastic bits hanging into their wheel wells, and I've seen cars dragging parts, and I've seen all kinds of things. And this particular car had been in the shop so often with weird and intractable suspension issues that caused all kinds of clicks, bumps, and other strange noises and feelings that I frankly could imagine just about anything. Within a half mile, I had to stop: the vibration became so heinous, and the noise so awful, that I could not be reassured by the voice on the tele-aid system that there was no problem. There was a serious problem, and it was getting worse. I will save you the troubleshooting nightmare and cut to the chase: two of the engine's three (sophisticated, vibration-isolating, liquid-filled) engine mounts had failed. Basically, the engine was being held up from falling into the street by forces being exerted on the transmission. Without warranty, the repair would have been thousands of dollars. This was at about 50K mi, when factory warranty would have just expired. They say extended warranties are not a good buy, but let me tell you: don't own a recent Mercedes without one.
Undrivability didn't require 50k miles to materialize, though. Before 1K, the thing died within a block of home with no explanation, and I found myself pushing it backward out of the intersection in which it had halted. Mercedez-Benz of Greenway Plaza carefully inspected the car and pronounced it cured, but when I went to pick it up, it died the exact same way on the valet. Apparently, dealer-added security technology didn't play well with at least some of the car's numerous built-in computers, which went on strike at odd and unpredictable intervals. Eventually Greenway Mercedes removed the gear and replaced it with LoJack Early Warning, which I do not recommend unless for the insurance discount; it's a long story, but LoJack won't tell you where the car is, and Houston Police Department (to which LoJack will refer you if you call looking for your car when a tow driver drops it in an unknown location in Houston) will transfer you numerous times before you finally realize nobody at HPD has any way to obtain the location from LoJack, either. See, LoJack won't find it for you, only for the police; and the police expect LoJack to help you because finding your car isn't their problem and they've no idea who to call to get a car located with LoJack. But the insurance discount is real; price it, compare it to the LoJack product, and make a business decision. They will never find your car (the owner of the lot where the car is dumped will help you on the next business day), but the insurance discount will come like clockwork.
The clicking and bumping that occasioned slow turns on smooth pavement was an interesting lesson in maintenance. Either Greenway Mercedes lied about replacing all those suspension parts, or Mercedes' suspension parts are horribly short-lived. But there is a third option: Greenway Mercedes is incompetent, and misdiagnosed the problem repeatedly, replaced a part unrelated to the issue you demonstrated over and over after they said they'd fixed it, and kept charging Mercedes for warranty work. Actually fixing the problem would be to kill the goose that was laying the golden service eggs, no? Much better to run you and Mercedes in circles. But I conjecture. Other Mercedes-certified mechanics were shocked to hear the lengthy story of my suspension woes with the 2005 E320 CDI, completely disbelieved that Mercedes would build a product so frequently failing, and suggested in no uncertain terms that the folks at Greenway Mercedes might not be the biggest crooks in the country, but were probably the biggest crooks west of the Mississippi.
So I started having its many warranty problems handled by the evidently more competent technicians at Alex Rodriguez Mercedes. These gentlemen will bring you your loaner, swap you your car, and bring you yours back fixed – all on a schedule you agree in advance. You never have to sit in a waiting room, fight traffic, suffer scheduling problems and so forth just because you had the bad judgment to believe that because Mercedes could build an outstandingly reliable car in 1982, it would surely be able to build a reliable car in this century. Let me save you some trouble: they've completely forgotten how. But if you live anywhere near the Johnson Space Center – the place Man first tried to reach when it spoke those first words back from the surface of the moon and uttered the word "Houston", but which is too unimportant to be allowed to display any of the Space Shuttles it successfully guided into space and back – I urge you to rely on Alex Rodriguez Mercedes-Benz. They can't make the car more reliable, but they'll make you much happier while it's being maintained.
One fine day I made an appointment for A-Rod Mercedes (as they call themselves) to look into why my stereo had quit working. This was a pain for me; I like music, which is why I paid a fortune for a plussed-up sound system. I wasn't exactly surprised that it had failed; I'd had the "Command" system (which includes the plussed-up sound system controls) crash repeatedly, including while I was depending on it for maps in a strange town while under a deadline, and remain broken and unbooting for days at a time, but this time I was determined to show a competent** technician the problem so that it might finally be diagnosed and fixed. After years of this kind of mistreatment, I was determined to have it solved before the extended warranty ran out. So I explained that I had a non-emergency problem, I wanted a loaner, and I was scores of miles away. A-Rod Mercedes' friendly service advisers set me up with an appointment to have a loaner delivered the very next Monday – less than a week away – so they could sort it out with minimal inconvenience.
A few other things associated with the Command system died over the next couple of days. I assumed it was an expansion of the audio problem; the radio, the auxiliary input I used for an iPod, the mapping system (which has a voice component), all became unresponsive. Still, the Mercedes' broad array of potential text messages available to warn the driver about everything from upcoming maintenance to impending engine calamities lay silent, suggesting that nothing particularly critical was amiss, just another audio-related bug. So on Friday – three days before the Monday loaner dropoff appointment – I don't expect serious trouble when I get the car loaded with people for a little outing. Everybody is in the car, everybody is buckled, the garage door is open, and I move to turn the key.
Nada.
A red backlight emphasizes the message that there is a malfunction. But since it's not even trying to turn over, I know damned well there's a malfuction. And I call A-Rod, who promptly sends a flatbed to haul off the dead husk of the "powerful" Mercedes. Diagnosis? For over a week the car had been slowly shutting down "non-essential" systems out of concern over a "dying" battery. One would think that if the car were at the point of deliberately killing non-essential systems in anticipation of failure, it might send me a little note that failure was at least foreseeable. But no, I got stuck for the Nth time by the "new" Diesel, which disgusted me mostly because I had come to Mercedes' defense so many times when explaining how the "old" Diesel had withstood so much for so long. (And still does: everything but the crummy A/C system runs like a champ, and the A/C system is just hopeless because it was designed by people who live in a country where A/C is an option and not a necessity in a roadcar. New Mercedes A/C systems were designed by a team Mercedes sent to Arizona not to come back without an A/C that could be sold in the South with a straight face. So the new A/C is very powerful but assumes that it's being used in a dry desert, and so promptly fills with condensation in the swamps of coastal Texas and thereafter, following an incubation period, gives off a persistent and nasty mold smell that dealers pretend is not a systematic problem even as they cycle through a long list of imaginative fixes that plainly reflect substantial post-development engineering resources, but none of which work. Short term, your dealer can kill it with harsh treatments that leave the car smelling like a chemical plant, but long term it all just grows back.)
So I asked about this "battery failure". The Diesel has, after all, two big-assed batteries. Oh, I'm told, they both failed. Ahem. Both? At once? I'm thinking its the recharging system; one of the batteries had just been replaced less than a year before. Haha, that battery will be replaced under warranty, but the other one will be about $400. I search online, certain I can find a better price, but I can't: the online price for a comparable battery is actually worse than I am quoted by A-Rod Mercedes. The thing is huge, uses cutting-edge technology to produce enormous cold cranking amps, and just can't be had for cheap. The alternative is that I can't start my car; so I shell out, dubious about the charging system and about the battery life and about the reliability of a car that knows it's failing but chooses to keep the fact a secret even while shutting down ill-designed electronic subsystems I assumed were falling to crasher bugs I'd previously seen.
So I start looking for a different ride.
Trading Three-Point Stars for Four Rings
And let me tell you what fun that new ride is. With approximately the same engine displacement, the 6-cylinder 2008 Audi A6 Quattro*** has comparable interior room, a trunk that's vastly bigger even than the 2.5-corpse trunk of the Mercedes, and full-time four wheel drive. This is a huge win. You want to cross an intersection, the car doesn't lose traction then claw to get it back: it uses all four wheels to get you across with no perceptible loss of traction.
You are at full speed on the freeway and some nutjob thinks it's a good idea to swerve directly into you? The Mercedes was controllable at speed, to be sure. You turn the biiig leather wheel and, dampened beneath a fortune in ground-insulating suspension, the front wheels turn and lean on Mercedes' peculiar front-end control system and the car – driven against the front tires by the rear tires' answer to the call of the relentless Diesel – is pushed sideways out of harm's way while you rely on anti-skid technology to protect you from the risk of strange traction issues on the freeway. Once in your new lane, the Mercedes settles down from the swaying induced by the little duel between the turned front tires and the pushing, ever-pushing rear wheels. And then you're back in the bank vault, insulated from the world, safe.
The same incident passes quite differently in the Audi Quattro. You pull the wheel with the same force – part fear of the near-wreck, part anger at the risk caused by the idiot coming your way – and there is no swaying left-to-right, no conflict front-to-back, no post-lane-change settling-down period. You turn the wheel and the Audi doesn't grudgingly agree to change lanes only while grumbling about what an imposition it is to be asked.
Instead, the Audi leaps with excitement, thrilled to do your bidding, ecstatic that you've asked it to do something more interesting than keep straight-on between an endless series of dashed lines. The Audi's all-time four-wheel drive pulls you where you want to go, ignoring road oil, rain, debris of other cars' shredded tires and shattered fiberglass, and eagerly awaits your next command – its next fondest wish. Sure, the Diesel in the Mercedes has more torque and feels like it's got more raw power, even though the Audi's gasoline engine has much more listed horsepower, but most of us aren't in a roadrace and are unconcerned with track times. What we want is to know what it feels like.
And in the Audi, I feel in control. Not worried about unexpected equipment failures. Not worried about lag in reacting to emergency commands. Not worried that the maps will quit while I'm in a rush in a strange place. Not worried even that the buzzing of Mercedes' plastic parts signifies other overlooked details with safety and reliability implications that will bite me, hard, in the back when I am most vulnerable. In the Audi, I am not worried at all about the car failing for any reason to perform exactly as I demand. And that security, and that control, represent the kind power I care most about.
* Except the A/C. Well, that was reliable too I suppose – it reliably sucked.
** Competent technician in this circumstance means a technician qualified by the absence of any relationship to Mercedes-Benz of Greenway Plaza.
*** After the value fiasco I had with the new Mercedes, I was gun-shy about buying new. In 2004, the '05 was the only recent-generation Diesel to buy from Mercedes, and my personal history with cars was to keep them longer than a decade so I didn't really have a lot of concern about resale value. Never having owned an Audi, but liking the reliability and performance implications in a firm able to take 1st, 2nd, and 3rd in a grueling long-distance torture event like LeMans (in 2010; in 2011 they took 1st after losing their other cars to crashes while overtaking slower Ferrarris, for the tenth victory in twenve 24-hour races), I thought buying used would give me an opportunity to try one out for a few years to see it if treated me like I expect a car ought.
Tuesday, August 2, 2011
ACAS: NAV Up Again In 2Q2011
American Capital announced its 2Q2011 quarterly result, and the result is more of the same: secured debt decreased ($100m repaid; ACAS has a debt:equity ratio of 0.4:1), and net operating income increased (to $71m, 145% above the year-ago quarter). But this is not the metric that most interests me as ACAS recovers from the liquidity crisis that crushed the valuation of its portfolio assets and share price. The single metric that most impacts my assessment of ACAS' recovery is the increase management is able to achieve in net asset value.
This quarter, management increased NAV to $13.16, up 10% from $11.97 in 1Q2011 and up 44% from $9.15 in 2Q2010. This valuation increase still shows some undervaluation in assets, though: ACAS claims the value of its investment in ECAS is $933m, though the value of ECAS' assets (over which ACAS has complete dominion, just as it has dominion over ECAS itself) is $1.035B. (Note that the gap between asset value and ACAS' claimed "fair value" is decreasing; it's just not yet at parity.)
One might try to draw some conclusion from ACAS' realized losses and compare them to ACAS' unrealized gains. A familiar meme among critics and a repeated question in conference calls is whether ACAS is selling its winners to look good and getting stuck with a portfolio of losers. The fact that ACAS is able to achieve $179m in realizations is nice, but the fact that this resulted in a realized loss of $177m strongly suggests that ACAS is reclaiming unproductive capital from investments whose thesis didn't survive the crash and isn't sticking investors with dogs in the name of making a quarterly number. The realized loss is a decrease from the year-ago quarter, but ACAS realized a gain last quarter. Which brings us to ...
... what games ACAS might be playing with its books. As suggested by management previously, ACAS has just announced that it had, or by the deadline would have, failed a RIC test. Intentionally failing a RIC test was one of management's schemes to roll forward operating losses whose value would otherwise be lost to ACAS and its shareholders. Losses are a tax asset: they offset taxable income. Losing the loss would really suck, and the failed RIC test preserves the perishable asset for next year. Management said at the same time that it expected to meet the RIC test in the future: this is a tax planning stratagem, not some kind of business failure. What does that mean? ACAS may be accelerating losses into this year when they are available so that it will make the most out of its carry-forward opportunity. We usually get an opportunity to see how the quarter's business has affected the portfolio mix, but there's strong reason to doubt that with investments as illiquid as ACAS', there's a lot of power to move the timing of deals in a transaction pipeline. I don't think we'll see that the quarter's business has really changed the overall numbers for the whole ACAS portfolio, even if ACAS management were trying to rush losses and working to bargain up gains in a way that would slow their transactions into a later reporting period.
The quarterly announcement discusses things like unrealized appreciation (can't complain about $587m in unrealized appreciation, can you?) and net earnings ($410m), but these things don't affect its eventual obligation to pay a dividend on resumption of BDC status (that is driven by taxable income, not SEC-reported "earnings"). For the time being, the metrics that have my attention are NAV (what the company is worth) and NOI (what the company earns without swapping assets around). The NOI increase has definitely shown the increases I expected following the debt restructuring, and I look forward to viewing it as a barometer of the success of the company's portfolio companies.
With respect to the NAV and NOI, ACAS has one strategy that has bourne some interesting fruit. Over the last year, ACAS has grown assets under management not only by holding them while value recovered, but by having controlled companies issue equity to new investors. American Capital Agency's issuance has been accretive to shareholders of AGNC (i.e., has raised AGNC's NAV at each issuance), and has boosted ACAS' assets under management – and thus ACAS' management fees, a source of NOI. Whether the public has an appetite for shares of American Capital Mortgage Investment Corp will determine whether ACAS can use MTGE to effect more of the same.
The breadth of the portfolio companies' business across industries and geographies makes it sensitive to broad macro-economic conditions, which is why management's prediction of success bears the qualification "if the economy continues to recover." I think long-term bets are in favor of recovery, and especially as ACAS has 0.4:1 debt:equity and is no longer in debt covenant default, there's very little reason not to regard ACAS as a long-term investment. Indeed, I bought some during the quarter for my niece. This is the niece whose mother sold the AAPL I recommended ten years ago, because her broker told her it had already moved up. This ACAS purchase is an account I won't be handing over to my sister's broker.
See you next quarter :-)
This quarter, management increased NAV to $13.16, up 10% from $11.97 in 1Q2011 and up 44% from $9.15 in 2Q2010. This valuation increase still shows some undervaluation in assets, though: ACAS claims the value of its investment in ECAS is $933m, though the value of ECAS' assets (over which ACAS has complete dominion, just as it has dominion over ECAS itself) is $1.035B. (Note that the gap between asset value and ACAS' claimed "fair value" is decreasing; it's just not yet at parity.)
One might try to draw some conclusion from ACAS' realized losses and compare them to ACAS' unrealized gains. A familiar meme among critics and a repeated question in conference calls is whether ACAS is selling its winners to look good and getting stuck with a portfolio of losers. The fact that ACAS is able to achieve $179m in realizations is nice, but the fact that this resulted in a realized loss of $177m strongly suggests that ACAS is reclaiming unproductive capital from investments whose thesis didn't survive the crash and isn't sticking investors with dogs in the name of making a quarterly number. The realized loss is a decrease from the year-ago quarter, but ACAS realized a gain last quarter. Which brings us to ...
... what games ACAS might be playing with its books. As suggested by management previously, ACAS has just announced that it had, or by the deadline would have, failed a RIC test. Intentionally failing a RIC test was one of management's schemes to roll forward operating losses whose value would otherwise be lost to ACAS and its shareholders. Losses are a tax asset: they offset taxable income. Losing the loss would really suck, and the failed RIC test preserves the perishable asset for next year. Management said at the same time that it expected to meet the RIC test in the future: this is a tax planning stratagem, not some kind of business failure. What does that mean? ACAS may be accelerating losses into this year when they are available so that it will make the most out of its carry-forward opportunity. We usually get an opportunity to see how the quarter's business has affected the portfolio mix, but there's strong reason to doubt that with investments as illiquid as ACAS', there's a lot of power to move the timing of deals in a transaction pipeline. I don't think we'll see that the quarter's business has really changed the overall numbers for the whole ACAS portfolio, even if ACAS management were trying to rush losses and working to bargain up gains in a way that would slow their transactions into a later reporting period.
The quarterly announcement discusses things like unrealized appreciation (can't complain about $587m in unrealized appreciation, can you?) and net earnings ($410m), but these things don't affect its eventual obligation to pay a dividend on resumption of BDC status (that is driven by taxable income, not SEC-reported "earnings"). For the time being, the metrics that have my attention are NAV (what the company is worth) and NOI (what the company earns without swapping assets around). The NOI increase has definitely shown the increases I expected following the debt restructuring, and I look forward to viewing it as a barometer of the success of the company's portfolio companies.
With respect to the NAV and NOI, ACAS has one strategy that has bourne some interesting fruit. Over the last year, ACAS has grown assets under management not only by holding them while value recovered, but by having controlled companies issue equity to new investors. American Capital Agency's issuance has been accretive to shareholders of AGNC (i.e., has raised AGNC's NAV at each issuance), and has boosted ACAS' assets under management – and thus ACAS' management fees, a source of NOI. Whether the public has an appetite for shares of American Capital Mortgage Investment Corp will determine whether ACAS can use MTGE to effect more of the same.
The breadth of the portfolio companies' business across industries and geographies makes it sensitive to broad macro-economic conditions, which is why management's prediction of success bears the qualification "if the economy continues to recover." I think long-term bets are in favor of recovery, and especially as ACAS has 0.4:1 debt:equity and is no longer in debt covenant default, there's very little reason not to regard ACAS as a long-term investment. Indeed, I bought some during the quarter for my niece. This is the niece whose mother sold the AAPL I recommended ten years ago, because her broker told her it had already moved up. This ACAS purchase is an account I won't be handing over to my sister's broker.
See you next quarter :-)
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