Vol. 32, No. 2 JANUARY 24, 2014 Two Wall Street, New York, New York 10005 www.grantspub.

com
So close to the sun
Jeff Bezos has set out to create the
everything store. Unfinished though
that universal quest may be in the nar-
row retailing sense, its a fait accompli in
the grand, monetary sense. On the one
hand, Amazons zooming share price
is a study in asset inflation. On the
other hand, Amazons margin-crushing,
bookstore-demolishing, customer-pleas-
ing merchandising strategy is a visible
source of price deflation. In the age of
QE, Amazon is the everything enter-
prise: fire and ice in a single ticker.
Now under way is a rumination on
the effect of the Federal Reserve on
Amazon, and of Amazon on the Fed-
eral Reserve. Its a coda to the page one
story in the previous issue of Grants. As
you may recall: Prices should be falling
in a time of technological wonder, or so
we contended. If it costs less to produce
things (and services, too), it should cost
less to buy them. Todays monetary au-
thorities move heaven and earth to re-
sist this benign tendency. Deflation is
an ogre, declared Christine Lagarde,
managing director of the International
Monetary Fund, at the National Press
Club last week. Just what grudge she
holds against everyday low prices, La-
garde didnt say. Whatever it is, she
would probably get an argument from
Bezos and his customers alike.
The trillion-dollar question is whether
the central bankers will wind up getting
more inflation than they bargained for.
We note that, according to the Confer-
ence Board, global labor productivity
growth decelerated in 2013 for the third
consecutive year and that, in the United
States, the capacity utilization rate for
December rose to 79.2%, the highest in
five years. What kind of inflation do the
bureaucrats wish to raise up? In Ameri-
ca, both kinds: the stock-market variety
to foster the confidence that leads to
a faster pace of consumption and the
checkout-counter kind to protect against
a return to the economic environment of
The Grapes of Wrath. The Feds are
shooting for a rate of rise of 2% a year in
consumer prices. They dont disclose the
rate of rise they prefer for stock prices.
Whatever it is, they seem to be hitting it.
Amazon has to figure among the cen-
tral banks warmest friends and worst
enemies. To any who preach the gospel
of the portfolio balance channel (ris-
ing asset prices lift all boats, supposed-
ly), AMZN, the share price, is a thing of
beauty. It just goes up. The Bezos shares
change hands at 1,454 times trailing net
income and 50 times enterprise value
to EBITDA, which is to say earnings
before interest, taxes, depreciation and
amortization. Amazons stock-market
capitalization stands at $186.3 billion.
Not one of the 47 security analysts who
follow the company rates it a sell, accord-
ing to Bloomberg; 11 have the temer-
ity to say hold. To declare an interest,
your editor is a limited partner in a fund
thats short the stock.
Ben Bernanke, a great one for the
portfolio balance channel, could hardly
ask for more, though, perhaps, he hopes
for more. As it is, the Dow Jones Indus-
trials change hands at 16 times earnings.
Collectively, they command a $4.7 tril-
lion market value. If all traded at the
Amazon multiple, the 30 would sell for
$459.1 trillion, or six times more than an-
nual worldwide GDP. Just think of the
latent spending power in that bit of port-
folio balance channeling, the outgoing
chairman might ruminate.
Attendees at the annual convention of
the National Retail Federation in New
York last week were rather ruminating
on their own survival. According to a
Jan. 15 dispatch by Lydia DePillis in the
Bezos-owned Washington Post, the hottest
ticket at the conference was a lunchtime
briefing about Amazon. People were
sitting on the floor and standing in the
aisles, DePillis relates, and she quotes
the speaker, Lee Peterson of WD Part-
ners, thus: If you dont think Amazon
is a problem for your business, I dont
care where you are in the world, you are
wrong, you are living under a rock. Its
time to come out.
Whats to be frightened of? Noth-
ing, a grateful Amazon customer might
reply. The most predatory aspirational
monopolist since John D. Rockefeller,
(Continued on page 2)
Gala winter
risk issue
Dad, Dad, why arent the Bears
in the Super Bowl?
2 GRANTS/JANUARY 24, 2014
(Continued from page 1)
a Best Buy executive, alluding to Ama-
zons founding genius, might counter.
Deflation, a scholarly Federal Reserve
economist might quietly interject (eco-
nomics being a science and scientists be-
ing coolly impartial, supposedly).
Open before us is a copy of The Ev-
erything Store, by Brad Stone, a 2013
book about Amazon. Reading itand it
is a pleasure to readone was not sur-
prised by Fridays news that Amazon
has filed a patent for something it calls
anticipatory package shipping. The
point of the invention seems to be that
theres no sense waiting for the custom-
er to order when you already read the
customers mind.
Like Sam Walton, the founder of
Wal-Mart, and Jim Sinegal, the pro-
genitor of Costco, Bezos strives to
amaze and delight the consumer. Since
people like to save money, Bezos has
built a business around the concept of
savings: savings of time, money and ag-
gravation. He has deployed shopping
bots, robots, apps, warehouses and
warehousemen in the service of low
prices. So doing, he has made some not
unimportant incremental contribution
to thwarting the Fed in its pursuit of its
peculiar definition of price stability.
Stone reports on business meetings
during which Bezos makes a big show
of keeping one chair open at the con-
ference-room table for the customer.
The stockholder is virtually present
at these gatherings, too, if we read Stone
correctly. This is so because, by Bezoss
lights, whats good for the customer is
good for the stockholder. That either-
or mentality, that if you are doing some-
thing good for customers it must be bad
for shareholders, is very amateurish, the
author quotes his subject as saying.
Whats been bad for the Amazon
shareholder is bear marketsthat and
only that over the past decade-and-a-
half. In just three weeks in June 2000,
the price of AMZN broke to $33 from
$57. Bezos kept up a brave front, scrawl-
ing, I am not my stock price on the
whiteboard in his office. You dont feel
30% smarter when the stock goes up by
30%, Stone quotes the visionary as tell-
ing the Amazon team during those dark
days, so when the stock goes down you
shouldnt feel 30% dumber.
But when the stock goes up by 700%
in just five years, as Amazons has done,
the average mortal might be inclined to
feel smarter. Especially might those feel-
ings wash over a body when, over the
same five-year span, earnings per share
declined at a compound annual rate of
29%. Watching the diverging trends of
share-price appreciation and EPS de-
preciation, an observer might easily con-
clude that Amazon occupies its own spe-
cial world with rules to match.
And one would be correct to this ex-
tent: Amazon funds itself by growing.
It collects money from its customers in
20-odd days. It holds its inventories for
not quite 50 days. It pays its vendors in
100-odd days. Nearby is a snapshot of
Amazons financial position. At year-
end 2012, accounts receivable came to
$3.4 billion, inventory to $6 billion and
accounts payable to $13.3 billion. So
despite minimal net income under gen-
erally accepted accounting principles,
Amazon funds capital spending through
operations. The year-end 2012 balance
sheet showed $7.1 billion in net cash.
Put yourself in Bezoss shoes. In Ama-
zon stock alone, you are worth $34 billion.
They are writing books about you. Some
people admire you, others fear you. You
1/21/14 5/11 5/09 5/07 5/05 5/03 5/01 5/99 5/97
Bezos, Bernanke & Co.
Amazon.coms share price (left scale)
vs. total assets of the Federal Reserve (right scale)
source: The Bloomberg
p
r
i
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e

p
e
r

s
h
a
r
e
F
e
d

a
s
s
e
t
s

i
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b
i
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i
o
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s
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
$4,500
0
50
100
150
200
250
300
350
400
$450
Amazon
Federal Reserve
Amazon.com Inc.
(in $ millions)
2012 2011 2010 2009 2008 2007
Accounts receivable $3,364 $2,571 $1,587 $988 $827 $705
Inventory 6,031 4,992 3,202 2,171 1,399 1,200
Accounts payable 13,318 11,145 8,051 5,605 3,594 2,795
Working capital (3,923) (3,582) (3,262) (2,446) (1,368) (890)
As percnetage of sales -6.4% -7.5% -9.5% -10.0% -7.1% -6.0%

Days sales outstanding 20 20 17 15 16 17
Days inventory 48 49 44 42 34 38
Days payable 106 109 111 108 88 89
Cash cycle (38) (41) (50) (51) (38) (33)

Cash from operations $4,180 $3,903 $3,495 $3,293 $1,697 $1,405
Capital expenditures (3,785) (1,811) (979) (373) (333) (224)
Free cash flow 395 2,092 2,516 2,920 1,364 1,181

Sales 61,093 48,077 34,204 24,509 19,166 14,835
y-o-y sales growth 27% 41% 40% 28% 29% 39%
Net income $(39) $631 $1,152 $902 $645 $476

Cash 11,448 9,576 8,762 6,366 3,727 3,112
Debt 4,385 2,299 1,032 430 468 1,325
Net debt (7,063) (7,277) (7,730) (5,936) (3,259) (1,787)
source: The Bloomberg
Copyright 2013 by Grants Financial Publishing, Inc. Reproduction or retransmission in any form, without written permission, is a violation of Federal Statute.
GRANTS/JANUARY 24, 2014 3

own the newspaper that Eugene Meyer
and Katharine Graham builtand that
digital technology, essentially your tech-
nology, unbuilt. You have changed the
world. What next? Whats next is a physi-
cal monument, Amazons new, daring,
greener-than-green, larger-than-life Se-
attle headquarters.
On Christmas eve, National Public
Radio reminded its listeners that 2013
was the year of the techno-edifice.
Apple, Facebook, Googleand Ama-
zonsimultaneously broke ground for
new corporate offices. Amazon is build-
ing in downtown Seattle. Three city
blocks will accommodate three 38-story
office buildings surrounding three glass
domesterrariums of a kindin which
fully grown trees will shade, refresh and
inspire the Amazon headquarters staff,
including 12,000 anticipated new hires.
Completion is slated for 2017.
What might the budgeted 3.3 million
square feet of office space cost? No esti-
mates have been published just yet, but
paid-up subscriber Paul Isaacan Ama-
zon bear, let the record showhas an
observation and a supposition. He points
out that Amazon has earned cumula-
tive net income of less than $2 billion
($1.964 billion through the third quarter
of 2013, to be exact) since its founding
in 1994. Not a lot of money for a busi-
ness that has made such a noise in the
world. And it would not be surprising,
Isaac goes on, given the complexity and
novelty of the construction in a relatively
high-cost area, if the final price tag on
the new corporate village winds up ab-
sorbing both of those lonely two billions.
Twenty years in business, all thisas
yetunprofitable activity, Isaac mar-
vels, and they are going to blow the cu-
mulative shareholders net earnings on a
snazzy new HQ?
The Everything Store relates how
Bezos once exploded in rage at a sugges-
tion that the companys frequent flyers
be allowed to fly business class. The man
who proposed the big idea, Bill Price,
vice president in charge of customer
service, is quoted as to what happened:
You would have thought I was trying to
stop the Earth from tilting on its axis. Jeff
slammed his hand on the table and said,
That is not how an owner thinks! Thats
the dumbest idea Ive ever heard.
This was apparently in the year 2000,
when Bezos was concentrating on not
becoming his (plunging) stock price.
Perhaps in the case of not becoming his
(surging) stock price, the founder sold
2,193,115 Amazon shares for pre-tax
proceeds of $711,159,646 in 2013. The
book quotes a longtime Amazon execu-
tive, Rick Dalzell, saying that Bezos is
inoculated against conventional think-
ing: What is amazing to me is that he is
bound only by the laws of physics.
Not flying too close to the sun is one
such law. Especially is it relevant in a
time of federally powered bull markets.
Among all the companies in the S&P 500
for which Bloomberg has data, Amazons
trailing 12-month P/E ratiothe afore-
mentioned 1,454 timesranks highest.
Somethings got to give. We have a hunch
its going to be the Amazon multiple.

Paycheck to paycheck
A slight emendation: Amazon isnt the
most highly valued company by any and
every reckoning of value. By the stan-
dard of enterprise value to sales, Conns
Inc. (CONN on Nasdaq) ties the Ev-
erything Store, 2.60 times to 2.60 times.
Now unfolding is a bearish analysis of a
stock that only seems to want to go up.
This may not be news you think you
can use. We understand that precious
few investors, even Grants readers, will
sell anything short. Federal Reserve
policy actively discourages the practice.
The normal human desire for a good
nights sleep likewise militates against
selling an asset you dont actually own
4 GRANTS/JANUARY 24, 2014
but must go out and borrow. We are of-
fering up more short ideas because we
cant find enough suitable long ideas (re-
ciprocally, in 2009 through 2012, we fea-
tured many more longs than shorts). We
make no representation that the stock
market has peaked. We only judge that,
based on our idea of what constitutes
value, the evident rewards of being long
increasingly pale before the evident
risks. Journalistically and analytically, we
are tilting to the bear side of the boat.
Back to Conns. Based in The Wood-
lands, Texas, the company operates more
than 70 clean, well-lit and well-stocked
stores in Texas, Louisiana, Arizona,
Oklahoma and New Mexico. Conns
sells Samsung washers and dryers, Serta
mattresses, Sony televisions and HP lap-
tops, among myriad other products and
brands. Many others do, too, of course.
But not every retailer provides financ-
ing solutions to a large, underserved pop-
ulation of credit-constrained consumers
who typically are unbanked and have
credit scores between 550 and 650, to
quote from our subjects SEC filings.
Conns is a subprime retailer, and cred-
itso we sayis its Achilles heel.
Conns, observes colleague Da-
vid Peligal, essentially allows these
customers to make an aspirational pur-
chase. The lucky aspirants just have to
be prepared to pay an 18% interest rate
for the privilege. Depending on wheth-
er youve been long or short, Peligal
adds, Conns has either been one of
your best investments or one of your
worst investments.
Conns is an outlier in many respects.
Its growth is supersonic, its sponsorship
is first class (Stephens Inc., the closely
held Little Rock investment bank, is
among the major investors), its margins
are otherworldlyand Amazon has so
far failed to lay a glove on it. Best Buy,
Sears Holdings Corp., Aarons, hhgregg
and Select Comfort Corp. are among the
predominantly brick-and-mortar retail-
ers that laid holiday eggs. Conns, whose
fiscal year closes on Jan. 31, has disclosed
no results beyond Novembers, which
as usualhave the look of typographi-
cal errors: Overall retail sales jumped by
49% and same-store sales by 32%.
The bull case for Conns is pretty
simple, Peligal observes. One, its
pretty hard to find retailers comping at
30%. With management guiding same-
store sales up 22% to 25% in fiscal 2014
and up 7% to 12% in fiscal 2015, the fig-
ures are clearly outpacing the competi-
tion. For perspective, Best Buys shares
plunged by almost 30% on Jan. 16,
when the electronics retailer disclosed a
0.9% drop in domestic same-store sales
comparisons in the nine weeks to Jan.
4. For a second thing, Conns sees long-
term potential for more than 300 stores
in the United States; it says its target
market comprises 30% of the American
population. Many bulls are no doubt
saying, Gee, theres growth and a big
runway for these guys! More thought-
ful optimists may simply reflect, Look,
we know this is going to end badly, but
theyre comping 30%. Too many peo-
ple are short it. Numbers are going up.
Were just going to ride this thing and
squeeze the shorts.
Not the least of Conns quirks is that,
of the 25.1 million-share float, no fewer
than 4.5 million shares are sold short.
The stock pays no dividend, and its
easy to borrow. The bear story is to us
though not yet to Mr. Marketmore
than persuasive.
Very simplistically, Peligal relates,
two things happen at a Conns store:
Merchandise walks out of the build-
ing and dollar bills walk in. The rate of
change in merchandise walking out is
what counts in the comp stores data. Its
the metric that was up by the amazing,
aforementioned 32% in November
and by 23.7% in the first nine months.
Short-sellers focus more on the rate
of growth of dollar bills walking in, Peli-
gal goes on. The essential bear story is
that the rate at which these dollars are
walking into Conns locations this year
is largely unchanged, surging comps and
new-store openings notwithstanding. So
something is wrong with this picture.
Essentially, Conns is giving people mer-
chandise and telling them they dont
have to pay for it just yet, or they can pay
for it slowly, or the company can restruc-
ture their loans, etc. With same-store
comps rising by double-digits and with
10% to 15% more locations this year than
last, cash revenues are essentially flat.
Whats financed the scorching growth is
customer receivables.
Catering as it does to people who
(many of them) live from paycheck to
paycheck, Conns has stepped up the
rate of its in-house lending. In fiscal
2012, it financed 60.4% of retail sales, in
fiscal 2013, 70.9% of retail sales. In the
third quarter ended Oct. 31, it financed
79.5% of retail sales, including down
payments, evidently a quarterly record.
Like many another retailer, Conns has
engaged an outside financing partner
in this case, GE Capitalto manage
part of the lending operation. But unlike
much of the retailing world, Conns has
elected to do the bulk of its financing
business itself (GE deals with only the
better credits). At a Dec. 11 conference
hosted by J.P. Morgan, the chairman and
CEO of Conns, Theodore Wright, ad-
dressed his companys financial strategy.
Sometimes people look at our credit
operation and they think of us as a credit
company, said Wright. We are not. We
are a retailer that has a credit product
it uses. We do one thing and one thing
only in credit. Its a secured installment
50
55
60
65
70
75
80
85%
50
55
60
65
70
75
80
85%
10/13
7/13 1/13 7/12 1/12 7/11 1/11 7/10
On the cuff at Conns
Conns percent of retail sales paid for by in-house financing,
including down payments received
source: company filings
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GRANTS/JANUARY 24, 2014 5

amortizing credit product to finance
products we sell. Thats it. Weve done
it for 45 years.
The bear story turns on this point. Is it
business as usual at Conns? Or will un-
scripted credit losses do the damage that
(to date) Amazon has failed to inflict?
We opt for the latter train of thought,
management for the former. The front
office has advised analysts to expect a
drop in credit problems in the fiscal year
ended Jan. 31, 2015. As a percentage of
the average portfolio balance, Conns
projects, bad debts will decline to 8% or
9% from the 9.4% or 9.7% expected in
the current fiscal year.
Now here is an odd thing, Peligal
observes, loans past due by 60 days or
more, expressed as a percentage of the
average portfolio balance, jumped to
8.5% in the latest quarter from 7% in the
like year-ago period. The delinquency
data commend themselves to the analyst
because they are unmassaged, less so the
bad-debt data. Suppose that a Conns
customer owes an unpaid credit balance.
It is 209 days overdue. By the book, 209
days is the bright shining line, cross it and
a good debt becomes bad. Imagine this
scenario: A Conns credit representative
calls the reluctant debtor, saying, Look,
you owe us $1,000. Just pay us $100 and
Ill restructure your account and make
you current. After having received a
string of phone calls from Conns, the
debtor may relent and pay the $100. If
he pays, Conns may reclassify his bal-
ance from late-stage delinquent to re-
aged receivable.
On Oct. 31, the Conns balance sheet
showed $422.2 million of long-term debt
and $3.7 million of cash and equivalents.
On Nov. 25, management completed
negotiations with a syndicate of banks to
expand and extend the companys asset-
based, floating-rate loan facility. The
amended terms feature a lengthening of
the maturity date to November 2017 from
September 2016, and a bumping up of
the borrowing limit to $850 million from
$585 million. Heres a sign of the times in
credit: The banks agreed to cut the bor-
rowing cost by 25 basis points per annum.
They must be bullish on Conns, tooor,
if not that, confident in Janet Yellen. We
surmise that it isnt getting any easier for
Conns to collect what its customers owe.
Thus, in the October quarter, operating
margin in the credit department fell to
19.6% from 29.9% a year before.
Elsewhere at Connsspecifically in
the beating heart of the retail business
gross margins are up, up and away. In the
October period, home-appliance margins
registered a year-over-year jump to 32.9%
from 28.2%; those in furniture and mat-
tresses, to 50.3% from 45.3%; and those
in consumer electronics, to 29.4% from
24.5%. All of this came amid a broad-
based rise in average selling prices. Or, in
the words of the latest 10-Q report: con-
tinued margin improvement across all
major product categories due primarily
to the continued focus on higher price-
point, higher-margin products and real-
ization of sourcing opportunities.
Too good to be true? One wonders,
especially in consumer electronics,
where, for retailers not named Conns,
gross margins cluster in the low 20s. Best
Buyno market darling latelystands
out for touching 24%. Then, too, gains in
gross margins typically come in dribs and
drabs, not by leaps and bounds. I mean,
Best Buy, if they do everything right and
everything goes their way, theyll have
gross margins up 50 basis points, one
bearish portfolio managerhe declines
to be identified by nametells Peligal.
Ive never seen a consumer electronics
retailer with anywhere near that level
of improvement. Its an absurd level of
improvement. . . . Theres literally noth-
ing you can do as a retailer of these high-
ticket, competitive-priced products to
do that. So its a mystery to us.
Were not the only curious ones. On
the Dec. 5 earnings call, Michael Poppe,
the Conns chief operating officer, field-
ed a question about the 490 basis-point
spurt in consumer electronics margins.
Better sales of pricier items, like 65- and
75-inch television sets, and fewer sales
of low-margin products, are the reasons,
he replied. Our anonymous source has
his own pet theory. He conjectures that
Conns is somehow lumping the present
value of future interest payments into
the sales price it recognizes at the time
the merchandise walks out the door.
Asked to comment, Brian Taylor, the
CFO, e-mailed a denial: We recognize
interest income as earned over the term
of the retail installment contractnot at
the time of sale, he said.
What do the consumers say? Not what
the company says in general, accord-
ing to Peligals survey of a number of
consumer-review sites. To investors last
month, Conns represented that, based
on company survey data, sales customer
satisfaction stood at 94% in each of the
first three quarters of this fiscal year. And
at the previously mentioned J.P. Mor-
gan conference, Wright remarked, And
because of the value we provide to the
consumer, we have a high rate of repeat
purchase71% of our credit balances
today are to customers who have bought
from us more than once. On average over
a five-year period, a customer that buys
with us will buy twice more again, so we
have strong customer retention because
of the value that we provide.
Maybe the consumers who unbur-
den themselves online are constitution-
ally cranky, but lets hear them out. On
the Consumer Affairs Web Site, out of
196 ratings describing overall satisfac-
tion, Conns received a 1-star rating 166
times, Peligal reports. It received
twenty 2-star ratings, five 3-star ratings,
two 4-star ratings, and three 5-star ratings.
On Jan. 20, a verified reviewer named
(Continued on page 8)
James Grant, Editor
Ruth Hlavacek, Copy Editor
Evan Lorenz, CFA, Analyst
David Peligal, Analyst
Charles Grant, Analyst
Hank Blaustein, Illustrator
John McCarthy, Art Director
Eric I. Whitehead, Controller
Delzoria Coleman, Circulation Manager
John DAlberto, Sales & Marketing
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6 GRANTS/JANUARY 24, 2014

CREDIT CREATION CAUSE & EFFECT
FEDERAL RESERVE BALANCE SHEET
(in millions of dollars)
Jan. 15, Jan. 8, Jan. 16,
2014 2014 2013
The Fed buys and sells securities
Securities held outright $3,778,907 $3,756,477 $2,696,582
Held under repurchase agreements 0 0 0
and lends
Borrowingsnet 116 130 568
and expands or contracts its other assets
Maiden Lane, float and other assets 228,360 226,078 206,056
The grand total of all its assets is:
FEDERAL RESERVE BANK CREDIT $4,007,383 $3,982,685 $2,903,206
Foreign central banks also buy,
or monetize, governments:
Foreign central bank holdings of Treasurys
and agencies $3,348,754 $3,352,545 $3,258,596
Despite the Feds swollen balance
sheetReserve Bank credit was up by
38.5% year-over-year to $4 trillion in
2013Federal Reserve remittances to
the U.S. Treasury last year fell by 12.1%
to $77.7 billion. Count the Bank of Ber-
nanke front and center among victims
of repressed interest rates. Now that Ja-
net Yellen has been confirmed and the
2014 fiscal budget completed, might
Congress focus on the flagging income
stream from the still expanding Fed?
The Fed makes money from what the
economists call seigniorage. Securities
held outrightTreasurys and agency
paper amount to $3.8 trillion of the
Feds $4 trillion in earning assets. Most
such assets are long-dated53% mature
in 10 years or more.
Buying securities, the Fed credits the
reserve account of the seller, which is
likely a commercial bank. These days,
the seller is probably inclined to let
those dollars sit in its Fed account. The
Fed earns interest on its assets, and it
pays interest on its reserve deposits
currently at the rate of one-fourth of 1%.
Return on the Feds assets declined to
2.3% in 2013 from 3.1% in 2012.
Leveraged bond investment isnt the
Feds only revenue source. [T]he New
York Fed charges account holders a mini-
mal handling fee for gold transactions,
including when gold enters or leaves the
vault or ownership transfers (moves be-
tween compartments), but otherwise does
BANK OF ENGLAND BALANCE SHEET*
(in millions of pounds)
Jan. 15, 2014 Dec. 18, 2013 Jan. 16, 2013
Loans 695 495 6,420
Securities 16,240 16,492 13,136
Other assets 384,687 384,492 390,298
Total assets 401,263 401,479 409,853
*totals may not add due to rounding
Your golds in the mail
More is less
Federal Reserve Bank credit (left scale)
vs. return on assets (right scale)
source: Federal Reserve
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1,000
2,000
3,000
4,000
$5,000
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1.0
2.0
3.0
4.0
5.0%
1/15/14 1/12 1/11 1/10 1/08 1/07 1/09 1/13
return on assets
reserve bank credit
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0%
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0%
30 year 10 year 5 year 2 year 6 month 3 month
MOVEMENT OF THE YIELD CURVE
source: The Bloomberg
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1/21/14
10/23/13
1/21/13
GRANTS/JANUARY 24, 2014 7

CREDIT CREATION CAUSE & EFFECT
REFLATION/DEFLATION WATCH
Latest week Prior week Year ago
FTSE Xinhua 600 Banks Index 7,949.56 8,178.20 9,477.77
Moodys Industrial Metals Index 1,882.42 1,823.26 2,025.21
Silver $20.30 $20.22 $31.81
Oil $94.12 $92.72 $95.49
Soybeans $13.17 $12.79 $14.30
Rogers Intl Commodity Index 3,475.17 3,417.24 3,746.61
Gold (London p.m. fix) $1,250.00 $1,244.25 $1,675.00
CRB raw industrial spot index 531.17 526.37 533.82
ECRI Future Inflation Gauge (Dec.) 100.7 (Nov.) 100.4 (Dec.) 104.8
Factory capacity utilization rate (Dec.) 79.2 (Nov.) 79.1 (Dec.) 77.8
CUSIP requests (Dec.) 1,578 (Nov.) 1,666 (Dec.) 1,743
Grants Story Stock Index* 142.86 141.06 *
Index=100 as of 7/31/13
ANNUALIZED RATES OF GROWTH
(latest data, weekly or monthly, in percent)
3 months 6 months 12 months
Federal Reserve Bank credit 32.8% 33.3% 38.5%
Foreign central bank holdings of govts. 7.7 4.8 3.7
Bank of England -1.5 -1.3 -2.1
Commercial and industrial loans (Dec.) 9.1 7.1 7.5
Commercial bank credit (Dec.) 3.0 0.6 1.2
Primary dealer repurchase agreements -24.2 -7.8 -6.6
Asset-backed commercial paper -13.9 -18.8 -20.2
Currency 8.9 6.8 6.2
M-1 13.0 11.3 8.8
M-2 5.5 7.3 5.3
Money zero maturity 4.5 7.9 5.7
not charge fees for gold storage, a New
York Fed spokesman e-mailed this publi-
cation in reply to a request for comment.
We asked in connection with the
contentious story of Germanys gold,
colleague Evan Lorenz writes. You will
recall that the Bundesbank last year an-
nounced its intention to repatriate 300
metric tons of gold from the New York
Fed and 374 metric tons from the Bank
of France. On Jan. 20, the Bundesbank
disclosed that only five tons had made
the trip from Manhattan to Frankfurt.
Theres nothing to see here, the Bundes-
bank said in so many words in a Jan. 20
press release. These things take time,
was the burden of the handout. Organi-
zational preparations. . . agreements and
contracts are voluminous and detailed.
Well, if the Bundesbank isnt wor-
ried, why should we be? Still, the sus-
picions aired in the previous issue of
Grants may yet have some bearing on
this matter. Might the agreements
and contracts in question pertain not
to moving and storing gold, but to lend-
ing it for a profit?
Logistical issues are bunk, a friend
in the physical gold business advises
us. I got an estimate a while back for
shipping two metric tons from Zurich to
Singapore, insured vault to vault. I was
quoted an all-inclusive price of $25,000.
Thats between two and three basis
pointsdirt cheap.

EFFECTIVENESS OF MONETARY POLICY
Dec. 2013 Dec. 2008 Dec. 2003
Monetary base ($ billions) $3,652.8 $2,643.2 $2,634.1
M-2 ($ billions) 10,986.3 8,183.8 6,039.6
Money multiplier (M-2/monetary base) 3.01 3.10 2.29
Velocity of money (GDP/M-2) 1.54 1.78 1.96
Your golds in the mail
More is less
Federal Reserve Bank credit (left scale)
vs. return on assets (right scale)
source: Federal Reserve
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2,000
3,000
4,000
$5,000
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1.0
2.0
3.0
4.0
5.0%
1/15/14 1/12 1/11 1/10 1/08 1/07 1/09 1/13
return on assets
reserve bank credit
8 GRANTS/JANUARY 24, 2014
(Continued from page 5)
Christopher of Austin, TX describes
his experience purchasing multiple
items from the north Austin Conns store
and why he gives the store a 1-star over-
all satisfaction rating. I feel like by pur-
chasing furniture through Conns, Ive
given up my ability to purchase things
on credit in the future. I have a credit-
monitoring program through my bank
that alerts me at least once a week that
Conns has reported me for delinquency,
despite repeated reassurance that my ac-
count, provided I honored my end of the
arrangement, which I did, would be both
current and removed from collections.
Im tired of 8:00 a.m. phone calls asking
me for money Ive already paid.
Moving to the Yelp Web site, Peligal
proceeds, an individual named P.B. of
McDade, TX also gave a Round Rock
[TX]-located Conns store a 1-star (out
of five) review on Nov. 29, 2013. Wrote
P.B: There is a moral to this rant. Every
single person I dealt with at Conns
EVERYONElacked ANY kind of
training on how to deal with ANY kind
of customer-service issues. There was
not one isolated instance, it was every-
one. So bad that I swear I was on Can-
did Camera. Im retired from 35 years
in the grocery business, the last 20 or so
running a store for 2 different large gro-
cery retailers. You will die without good
customer service. Conns does not even
have a clue. Bold prediction. Conns will
fail. This was my first and last shopping
experience with Conns.
One review, posted on the Glassdoor
Web site, especially stands out. Signed
Cut throat, the critic identifies him-
self as a Conns store manager in Fort
Worth, Texas. His advice to Conns se-
nior management? Save what u get,
exit to another industry. Or maybe just
sell your stock.

Ask Mr. Google

What could be driving public curi-
osity about biotechnology (check the
above graph)? Health consciousness?
The love of learning? Or the fact that
the Nasdaq Biotechnology Index has
returned 11.2% in the year to date
after delivering 60% last year? We re-
port, you decide.

Heretofore unimagined
The world has never seen the likes
of Chinas credit frenzy. From year-end
2008 through the third quarter of 2013,
assets on the balance sheets of Chinese
banks grew by $15.1 trillion to $24.3
trillion. That growth in assets is greater
than todays $14.6 trillion stock of as-
sets at American commercial banks. For
further perspective, Chinas GDP is re-
ported to sum to $8.9 trillion, Americas
to $16.7 trillion. (U.S. national income
data should be taken with a grain of salt;
for Chinas, empty the cellar.) Chinas
bank footings represent 33.1% of world
GDP, though Chinas economic output
amounts to just 12.2% of world GDP.
In 1994, when Japan had the world on a
string, Japanese output peaked at 17.9%
of global production; in the same year,
Japanese banking assets topped out at
27.3% of world GDP. Nineteen years
later, Japans share of earthly GDP has
shrunk to 6.8%, its banking assets to
11.8% of that all-in figure.
All of which will serve to introduce
China Cinda Asset Management Co. Ltd.
(1359 on the Hong Kong Exchange), a
company thatby every outward sign
would seem to be Johnny-on-the-spot.
Cinda is in the debt-restructuring and
salvage field. It manages distressed assets
(72% of pretax profit in the first half of
2013) as well as having fingers in the pies
of private equity, insurance, wealth man-
agement, securities brokerage and other
financial services. It employs 18,259 peo-
ple. The shares debuted in a Dec. 12 ini-
tial public offering that raised $2.5 billion
and was 25 times oversubscribed. There
are 11.7 billion shares outstanding; the
market cap falls just shy of $25 billion; the
prospectus runs to 710 pages. In preview,
Grants is bearish.
Constant readers will quite correctly
feel a sense of dj vu, as Chinaand
Cindahave struggled with desperate
debts before. Founded in 1999, Cinda
was one of the four asset management
20
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60
80
100
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60
80
100
7/10 1/11 7/11 1/12 7/12 1/13 7/13
Just asking...
relative frequency of Google searches for biotech stocks
source: Google Trends
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GRANT

S
Save the date
Spring 2014 Conference
Avoid disappointment!
Register online now.
For information, call 212-809-7994.
Tuesday, April 8, 2014
The Plaza
Manhattan
Register or download a form at
www.grantspub.com/conferences
GRANTS/JANUARY 24, 2014 9

companies created to relieve Chinese
banks of their nonperforming loans. Cin-
das special charge was China Construc-
tion Bank (Grants, Nov. 4, 2011). We see
that Cindas management has spun a nar-
rative of the corporate history involving
three epochs or phases.
During Phase 1, the policy phase,
which spanned 1999 through 2003, Cin-
da took aboard problem loans from China
Construction and China Development
Bank. More than generously, Cinda paid
100 cents on the dollar for this debris.
Phase 2, the transition phase, 2004-
2009, featured a change in corporate
strategy. Rather than paying par for dis-
tressed assets, Cinda got it into its head to
pay less than par (or received the Partys
permission to do so). Too, the transition-
ing Cinda went on a diversification drive.
Phase 3, the commercial phase, be-
ginning in 2010, finds Cinda running a
for-profit distress business at the very mo-
ment when nonperforming debt must be
fairly raining on the Peoples Republic. A
knowledgeable observer of the Chinese
banking scene, speaking to colleague
Evan Lorenz on condition that he not
be named, says that a significant part of
the growth in bank lending derives from
capitalized interest. Because credit has
grown so fast relative to GDP, our source
says, there are de facto nonperforming
assets that are not being written down,
or, we would add, even acknowledged.
[T]he new credit expansion that you are
seeing contains a lot of interest to pay the
old debt, our informant continues. The
banking system is keeping itself liquid at
the expense of the real economy. Thats
why you have more and more credit for
the same level of activity.
Whisper it quietly, advised HSBC
last month around the time of the IPO,
but Cindas stock offering represents the
first opportunity for overseas investors to
buy into Chinas shadow banking system.
Funded by the major banks, Cinda has
become something of a shadow lender
itself. Plainly, this is not your everyday
distressed-debt shop. Neither is China
your workaday advanced economy.
Details on Cindas operations, his-
tory and, above all, foibles may or
may not present the non-short-selling
readers of Grants with an immediately
actionable investment idea. (Anyway,
even for those who do sell short, Cinda
shares are currently a tough borrow.)
What it will do instead is provide them
with a better understanding of the fi-
nancial accident-waiting-to-happen
called the Peoples Republic.
If you, like us, are curious about
Cinda, you will want to know where
it came fromsome of the color from
managements Phase 1. You will won-
der in vain, as Lorenz observes (he hav-
ing been beguiled the past week with
that 710-page prospectus), since the
company has released no history prior
to 2010. What we do know about Cin-
das 2009-era loan purchases is that they
were money-losers. It finally fell to the
Ministry of Finance to bail out Cinda,
the designated bailer-out.
Then again, Lorenz observes, past
performance would tell you only so
much, since Cinda has changed its M.O.
Starting in 2010, the company bought
accounts receivable from nonfinancial
businesses in addition to taking on as-
sets from commercial banks. Such claims
against nonfinancial entities made up
57.1% of distressed-debt assets as of
June 30; they amounted to just 5.3% of
such assets at year-end 2010.
As we see the situation, Cindas Phase
3 bears a telling and worrying similarity
to policy Phase 1. At the start, you will
recall, Cinda paid banks par for debts
not worth par. It apparently did so at
the governments behest. Now, under
what management calls its restructur-
ing model, Cinda is once again paying
par for assets thatat this long remove
from China, at leastseem not exactly
par quality. Why pay par? Quoth Bank of
America/Merrill Lynch in a Jan. 15 note:
Cinda believes that these assets are dis-
tressed due mainly to short-term liquid-
ity issues, with no fundamental prob-
lems. Comments HSBC: What Cinda
is doing here is basically subprime lend-
ingand it views it as a growth engine.
Distressed assets managed under this,
the restructuring technique, increased
to 90.2% of total distressed debts on June
30 from 55% in 2011 and 85.7% in 2012.
Ostensibly, Lorenz relates, Cindas
nonfinancial distressed-debt business
focuses on balances owed by company
A to company B, the two corporate
entities being separate and distinct. A
story in the Dec. 12 editions of The Wall
Street Journal describes a very different
business model. According to the Jour-
nal, Cinda paid $84 million to Jiangsu
Zhongnan Construction Group Co., the
would-be builder of Chinas biggest of-
fice tower, to buy out debts owed to it by
two property developers. . . . Both devel-
opers are wholly owned by Zhongnan,
making the payout to Zhongnan a loan,
rather than a distressed-asset buyout,
according to financial professionals. In
other words, Cinda lends to corporations
that otherwise struggle to obtain financ-
ing from banks through the charade of
intercompany receivables.
Ultimately, something tells us, Cinda
will be a balance-sheet story rather than
an earnings story, but the quality of the
earnings is already open to question.
While profit grew to rmb. 4 billion ($672
million) in the first half of 2013 from
rmb. 3 billion in the first half of 2012,
Lorenz points out, you will seeif you
look at note 30 in Cindas financial state-
mentsthat accounts receivable relating
5
10
15
20
25
30
35%
5
10
15
20
25
30
35%
2013 2011 2009 2007 2005 2003 2001 1999 1997 1995 1993
Now, how might this end?
commercial bank assets in U.S., Japan and China
as percent of world GDP
sources: The Bloomberg, IMF, Federal Deposit Insurance Corp, Bank of Japan
p
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U.S.
China
Japan
10 GRANTS/JANUARY 24, 2014
past six months. In April, the garden-
variety money-market rate was quoted
at 3%, now its running at 6% (a liquid-
ity injection by the Peoples Bank on
Tuesday pushed the rate back down to
5.44%). You will recall that, following the
China Everbright Bank default in June,
overnight Shibor rates lurched to 13.44%
[Grants, June 14]. Whither Chinese inter-
est rates? Carl E. Walter, co-author with
Fraser J.T. Howie of Red Capitalism:
The Fragile Financial Foundation of
Chinas Extraordinary Rise, makes the
point that, for many Chinese borrowers,
the demand for credit is inelastic: Peo-
ple will pay anything for it. And Walter
adds, How are you going to prevent the
big state-owned enterprises from getting
their chunk of capital?
Cinda changes hands at 16.1 times
projected 2013 net income and at 12.6
times the 2014 estimate; as a percent-
age of (guilelessly) estimated year-end
book value per share, the stock trades at
194%. Not cheap, is our reading of the
facts and figures.
Finally, as Lorenz concludes, While
Cinda may be Chinas first banking
IPO, more are in the pipeline. China
Huarong Asset Management Co., the
asset-management company founded to
scrub Industrial and Commercial Bank
of China 15 years ago, is preparing to
list. The other two AMCsChina Ori-
ent and Great Wall Asset Management
Corp.are expected to follow Hua-
rong. Patienceand, of course, vigi-
lancewould seem advisable.

From outer space

Two years ago, it was a career risk
to hold peripheral debt for professional
fixed-income managers, The Wall Street
Journal quoted a man from UBS Wealth
Management as saying the other day.
Now its a risk not to hold it.
So begins a survey and a close-up: An
overview of the rout of the credit bears is
preface to a focused look at one particu-
lar beneficiary of the rise in bond prices
and the fall in yields and spreads. Intelsat
SA (I on the New York Stock Exchange)
is that particular borrower. In preview,
we do not contend that the credit mar-
kets are about to blow up again. What we
rather believe is that those markets are
being priced as if they can never blow up
again. Thus, we conclude, En garde!
If youve been away from Wall Street
tween 2010 and the first half of 2013.
Profitability couldnt keep pace, as re-
turn on equity tumbled to 14.6% in the
first half of 2013 from 25.5% in 2010.
Funding presents another risk to the
would-be adventurer in Chinas sub-
prime credit markets. Time was, Lo-
renz notes, when Cinda financed its
assets through such politically connected
conduits as the Peoples Bank and the
Ministry of Finance. These biddable
sourcesalong with stockholders eq-
uityfunded 70% of assets in 2010 and
only 37% at mid-year 2013. Borrowings
from banks contributed just 5% of fund-
ing in 2010, 37% at mid-year 2013. As of
June 30, 61% of Cindas interest-bearing
liabilities will reprice or mature in less
than a year, no small consideration in
these days of off-again, on-again liquid-
ity. As Arthur Kroeber, head of research
at GaveKal Dragonomics, observes, Chi-
nese interest rates have doubled in the
to distressed assets grew to rmb. 6.8 bil-
lion on June 30 from rmb. 4.2 billion at
year-end 2012. Included in accounts re-
ceivable are three-year-old claims against
China Orient Asset Management Corp.,
the asset-management company found-
ed in 1999 to clean up Bank of Chinas
problem loans and a claim against China
Galaxy Investment Management, an al-
ternative investment company and the
former employer of Cinda independent
director Li Xikui. Adjusting for these
claims, accounts receivable pertaining to
distressed debts jumped to rmb. 4.8 bil-
lion on June 30 from rmb. 1.9 billion at
year-end 2012. This increase is equal to
60% of Cindas profit before taxes in the
first half of last year.
As in Americas own credit frolics,
fast-growing balance sheets serve both
to boost profitability and to flatter asset
quality. In Cindas case, assets registered
compound annual growth of 28.8% be-
China Cinda Asset Management Co. Ltd.
(in rmb. millions, except per-share data)
spot rate: rmb 6.05=$1
6 mos. to
6/30/2013 6/30/2012 2012 2011 2010
Total revenues and income 18,669.4 12,209.6 32,335.2 24,382.1 24,260.4
Profit before tax by segment
Distressed asset mgmt. 3,710.7 2,999.0 6,234.0 7,201.8 7,464.9
Fin. investment and asset mgmt. 1,147.3 800.8 3,284.6 2,488.2 2,332.8
Fin. services 283.7 89.2 164.3 (207.0) 180.3
Elimination (4.3) (5.8) (87.0) (424.8) (21.6)
Total profit before tax 5,137.4 3,883.2 9,595.9 9,058.2 9,956.4
Taxes 1,120.4 901.7 2,378.7 2,271.9 2,453.8
Profit after taxes 4,017.0 2,981.5 7,217.2 6,786.3 7,502.6
Non-controlling interests (47.8) (3.8) (89.1) 23.6 103.6
Net income 4,064.8 2,985.3 7,306.3 6,762.8 7,399.0
EPS 0.13 0.11 0.25 0.27 0.32
Cash 29,730.9 42,726.3 27,187.2 33,772.6
Accounts receivable 8,896.3 5,257.3 4,062.5 6,418.2
Distressed debt assets 86,357.1 56,090.4 17,599.6 8,029.9
Debt-for-equity portfolio 43,654.6 48,238.6 50,594.8 52,312.1
Other 114,914.2 102,301.8 73,679.9 50,168.6
Total assets 283,553.0 254,614.4 173,124.0 150,701.4
Borrowing from PBoC 6,872.7 7,053.4 11,310.7 16,464.6
Borrowing from MoF 33,564.3 38,112.3 46,983.8 46,204.8
Borrowings from comml banks 104,100.8 76,099.2 25,178.9 7,826.2
Other liabilities 76,269.9 72,464.7 46,807.9 37,704.2
Minority interest 6,382.7 6,111.2 5,029.6 5,476.2
Equity 56,362.6 54,773.6 37,813.1 37,025.3
Total liabilities and equity 283,553.0 254,614.4 173,124.0 150,701.4
source: company reports
GRANTS/JANUARY 24, 2014 11

demonstrated tendency of customers
broadcasters, telecom operators, govern-
mentsnot to leave the satellite service
provider they signed up with makes a
third. Even so, government-sponsored
satellite operators are proliferating; eight
new ones have launched since 2005,
while 12 are under construction and 23
are in concept, according to SES, a
Paris-listed competitor of Intelsat. SES,
Intelsat and Eutelsat (another Paris-list-
ed Intelsat rival) combine for half of the
fixed-satellite service market share. SES
reckons that, given current and prospec-
tive growth in national satellite opera-
tors, that combined 50% share is bound
to dwindle.
Heavily encumbered Intelsat needs
growth or, at a minimum, stability. With
a ratio of long-term debt-to-capital of
107%, the company is twice as leveraged
as SES and Eutelsat. Over the past five
years, revenue has grownbarelyto
$2.63 billion in the 12 months through
Sept. 30 from $2.36 billion. Net income
has been negative. Over the last half-de-
cade, in pointed contrast, SES has aver-
aged 26.7% ROE, Eutelsat 19.9% ROE.
So we are prepared to guess that you
will hear no criticisms of QE, zero-per-
cent interest rates or the Ph.D. standard
of monetary management around the
Intelsat corporate headquarters. In 2013,
the company refinanced some $10 billion
of debt through bond sales, bank financ-
ings and the IPO. Management was able
to exchangefor instancean issue of
11 1/2% payment-in-kind notes for an is-
sue of straight 6 % notes and a Libor
plus 275 basis-point term loan for a Libor
plus 300 basis-point term loan. As of year-
end 2012, long-term debt stood at $15.9
billion; as of Sept. 30, the grand total had
been whittled down to $15.3 billion. As
of year-end 2012, earnings before interest
and taxes covered interest expense (or
didnt quite cover interest expense) by a
factor of 0.96; nine months later, at Sept.
30, EBIT covered interest expense by
the aforementioned 1.27 times.
No authority on the fixed-service satel-
lite industry, we conclude with questions
rather than predictions. Will Intelsat be
able to remain in the technological van-
guard? What new technology might be in
the wings to upset it? And if the risks of
obsolescence are as plausible as we imag-
ine them to be, what will become of the
Intelsat debt holders? Artificially low in-
terest rates may prolong a corporate life,
but they cant confer immortality.

for a while, you might be almost as

amazed by the contours of the world as
was the steadfast 2
nd
Lt. Lieutenant Hi-
roo Onoda upon his return to Japan after
29 years in the jungle. Onoda, who died
last week at the age of 91, had spent
nearly three decades manning his post
and honoring his emperor in the Philip-
pines following the 1945 Japanese sur-
render. Subsisting on coconuts, bananas
and the odd cow, he refused to believe
that World War II was over until he heard
it from the lips of his former command-
ing officer (which long-since demobi-
lized soldier the Japanese government
flew to the Philippines to deliver the
necessary personalized message). Ono-
da had grown up, as his New York Times
obituary put it, in a lotus land of paper
and wood; he returned, in 1974, to sky-
scrapers and jet planes. The changes as-
tounded him.
So might changes in the debt markets
astound you if youve been out of the
loop for even a few fiscal quarters. Crisis
in the euro zone? Forgotten. Earlier dis-
turbances in mortgage-backed securities,
structured credit and junk bonds? Dis-
tant memories of no immediate invest-
ing relevance. The storms have abated
and the wounds have healed. Its back to
well-dressed people, down on all fours,
rooting around for basis points.
This month, Ireland sold 3.75 bil-
lions worth of 10-year bonds at a yield
of 3.40%; investors had placed orders
for 14 billion. Italy borrowed for three
years at 1.51% and Spain for five years
at 2.41%. The Spanish lender Bankia
placed a five-year note at a yield of 3.5%,
the institutions first senior unsecured
obligation since its 2012 collapse and
bailout. The 10-year obligations of the
France of a distracted Francois Hollande
are quoted at just 2.40%.
Though the mere hint of Federal
Reserve tapering set emerging mar-
kets on their ear last spring, the likes of
Petroleo Brasileiro SA, Petroleos Mexi-
canos and the governments of Mexico,
Indonesia, Poland, Slovakia and Roma-
nia have gotten the international debt
markets off to the busiest January EM
issuance since Bloomberg started keep-
ing records in 1999.
The same bullish narrative pertains
in other departments of the credit mar-
kets. A bond backed by a homeless
shelter would not, at first glance, appear
to be the stuff of investors dreams, the
Financial Times led off a Jan. 13 story
on the resurgent market in commercial
mortgage-backed securities. But a mort-
gage on a homeless shelter was, indeed,
among the 137 commercial liens sup-
porting a 2013-vintage CMBS deal pack-
aged last year (and successfully placed
with investors) by Citigroup.
Which brings us to Intelsat and the
red carpet on which it trod during its
recent journeys to the credit markets.
The giant, fixed-satellite services com-
pany is highly leveragedand long has
been. Its capital-intensive business is
bedeviled by sluggish revenue growth.
Its senior debt is rated B3/B-plus; in the
third quarter, earnings before interest
and taxes covered interest charges by
1.27 times, a whisker.
Intelsat has been around longer than
many of todays investors have, col-
league Charley Grant relates. Founded
in 1964 as the International Telecom-
munications Satellite Consortium, a kind
of orbital United Nations, the company
launched its first satellite, Early Bird, in
1965. Four years later, the Consortium
transmitted the first televised images of
Neil Armstrong and Buzz Aldrin walking
on the moon. In 1978, it was a Consortium
satellite that connected Etam, W.Va., with
Goonhilly Downs in the U.K. and Tanum,
Sweden, in a formative demonstration of
the future of the Internet. More pioneer-
ing technological feats followed.
In 2001, Grant continues, came a
financial milestone: the Consortium
now the property of 146 member states
turned itself into a private company, a
huge change in corporate culture (quar-
terly board meetings had to be conducted
in three languages; they had dragged on a
full week). Intelsat didnt remain long in
one set of private hands. It passed from
private-equity buyer to private-equity
buyer in 2005 and 2008. BC Partners and
Silver Lake Partners wound up owning it
in 2008; they paid $5 billion.
It would be tedious rather than in-
teresting to chronicle this cavalcade of
deals, Grant proceeds. Suffice it to
say that Intelsat has steadily acquired
more debt and more assets, though not
always more profits. In April 2013, BC
Partners and Silver Lake peeled off an
18% interest to sell to the public. The
IPO, which realized $500 million, val-
ued the common equity not at $5 bil-
lion but at $1.85 billion.
Say this for the fixed-satellite business:
Not just anyone can decide to compete
in it. High fixed costs pose one barrier to
entry, the inherent scarcity of desirable
orbital slots constitutes another. The

Vol. 32, No.02f-ctr JANUARY 24, 2014 Two Wall Street, New York, New York 10005 www.grantspub.com
Despite the Feds swollen balance
sheetReserve Bank credit was up by
38.5% year-over-year to $4 trillion in
2013Federal Reserve remittances to
the U.S. Treasury last year fell by 12.1%
to $77.7 billion. Count the Bank of Ber-
nanke front and center among victims
of repressed interest rates. Now that Ja-
net Yellen has been confirmed and the
2014 fiscal budget completed, might
Congress focus on the flagging income
stream from the still expanding Fed?
The Fed makes money from what the
economists call seigniorage. Securities
held outrightTreasurys and agency
paper amount to $3.8 trillion of the
Feds $4 trillion in earning assets. Most
such assets are long-dated53% mature
in 10 years or more.
Buying securities, the Fed credits the
reserve account of the seller, which is
likely a commercial bank. These days,
the seller is probably inclined to let
those dollars sit in its Fed account. The
Fed earns interest on its assets, and it
pays interest on its reserve deposits
currently at the rate of one-fourth of 1%.
Return on the Feds assets declined to
2.3% in 2013 from 3.1% in 2012.
Leveraged bond investment isnt the
Feds only revenue source. [T]he New
York Fed charges account holders a mini-
mal handling fee for gold transactions,
including when gold enters or leaves the
vault or ownership transfers (moves be-
tween compartments), but otherwise does
not charge fees for gold storage, a New
York Fed spokesman e-mailed this publi-
ried, why should we be? Still, the sus-
picions aired in the previous issue of
Grants may yet have some bearing on
this matter. Might the agreements
and contracts in question pertain not
to moving and storing gold, but to lend-
ing it for a profit?
Logistical issues are bunk, a friend
in the physical gold business advises
us. I got an estimate a while back for
shipping two metric tons from Zurich to
Singapore, insured vault to vault. I was
quoted an all-inclusive price of $25,000.
Thats between two and three basis
pointsdirt cheap.

cation in reply to a request for comment.
We asked in connection with the
contentious story of Germanys gold,
colleague Evan Lorenz writes. You will
recall that the Bundesbank last year an-
nounced its intention to repatriate 300
metric tons of gold from the New York
Fed and 374 metric tons from the Bank
of France. On Jan. 20, the Bundesbank
disclosed that only five tons had made
the trip from Manhattan to Frankfurt.
Theres nothing to see here, the Bundes-
bank said in so many words in a Jan. 20
press release. These things take time,
was the burden of the handout. Organi-
zational preparations. . . agreements and
contracts are voluminous and detailed.
Well, if the Bundesbank isnt wor-
Your golds in the mail
We have broken out the centerfold story for your reading comfort.
No broken headlines across pages any longer.
More is less
Federal Reserve Bank credit (left scale)
vs. return on assets (right scale)
source: Federal Reserve
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