"The Wall" IPO?

The Stay Invested portfolio was UP today: $215.21 (+0.21%)

Overall GAIN/LOSS YTD: +$681.64 (+.66%)

Our benchmark index, the S&P 500 is UP Year-To-Date +3.57%

http://money.cnn.com/data/markets/sandp/

"The problem of social organization is how to set up an arrangement

under which greed will do the least harm, capitalism is that kind of a system. "

― Milton Friedman

Today's Buys

This morning I bought a full position in Constellation Brands (STZ) with a limit order of $156. I've placed a $225 price target on the stock which is 44% above our buy price. I had set the limit order while researching the name for the bull pen and it triggered before I could finish. That's okay, hopefully the stock will pull back again as it may be a while before we get better news in this name. Right now my main thesis is that the $4 billion dollar stake in Canopy Growth has been offered up for free during the recent sell off in STZ.

Before the close I am considering taking small positions in Independent Bank Corp (INDB) and First Community Corp (FCCO). Both of these regional banks have triggered buy signals.

The Wall Public as a Public Company

Recently a member of an investing forum suggested that President Trump is going to take the border wall public, its stock exchange symbol will be MYWL.

I laughed, and then considered doing a deeper dive on the idea of using market forces at our borders to see what the outcome might be, where revenues could be used and might there be other social and economic benefits or negative outcomes. The first question to ask is; "Is a border a financially lucrative business?"

Is a border a financially lucrative business?

There are 350 million documented border crossings a year at 48 entry points each year. The fee to cross varies due to exchange rates, but it’s roughly $20, or about $7 billion gross annually. When compared to the $3,000-$4,000 average fee charged by Coyote smugglers, the $20 fee for legal crossing is a bargain, if you can cross legally. At the southern border there were 303,916 apprehensions that can be viewed as ‘Non-Paying Border Crossings’. In addition there are revenues that come from seizure of assets; for this exercise I’ll just count liquid cash assets not the assets that have to be sold at auction. It’s a little tricky to separate out the budget costs for the Southern border vs the Northern border, but if I use agent staffing as a measure of expense I think we get close. There are 19,437 Border Patrol Agents in the U.S, roughly 85% of those work on the southern border. Looking at numbers from the Department of Homeland Security, the breakdown of agents working the southern border within other agencies (ICE, Customs, Immigration) roughly account for 85% in those groups as well. For this exercise I’ll assume that 85% of the annual budget can be attributed to the southern border operations. Overly simplistic, but probably not far off. The 2019 budget for US Customs and Border Protection is $16.690 billion, and US Immigration and Customs Enforcement have a budget of $8.816 billion for a total of $25.506 billion. The southern border should end up spending almost $21.7 billion of this budget.

Southern border Expenses: $21,680,100,000

Apprehensions expense: $ 6,078,320 non-paying crossings valued at $20 each

Sub Total $21,686,178,320

Seizures Revenues: $ 5,169,593

Current Revenues: $ 7,000,000,000 paying legal border crossings at $20 each

$ 7,005,169,593

Total Loss ($14,680,930,407)

From this quick, back of the envelope analysis, tax payers are on the hook for $21.7 billion in operating costs that by year end actually cost $14.7 billion, a $7+ billion dollar difference. By that analysis the president got his $5 billion for the wall, plus an extra $2 billion. In fact the $5 billion being fought over now could come out of current revenues since tax payers are already footing all the operational expenses plus annual increases. From this data it would appear that the southern border is not financially lucrative, but with efficiencies it could be.

If I were an activist investor the southern border would be a takeover target.

Are Estimates Correct?

It’s my own personal issue, I question everything, and when the government says it, I question it twice. A commonly quoted number for illegal immigrants living in the U.S is 11.3 million people, a little over 3%. I’ve often wondered how that estimate was arrived at, it just seems low. For instance, I’ve seen other research that tries to estimate how many people evade paying taxes, how often do you lie, or how many illegal IV drug users there are? How do you accurately measure a group that actively seeks to avoid detection? Turns out the MIT Sloan School of Management had the same issue and conducted their own study and published their findings in 2018, very timely.

“The commonly quoted estimate of 11.3 million is extrapolated from population surveys. We read that [the previous estimates] were based on surveys, but surveys may not be the most appropriate method for measuring hidden populations”

“The research found that the number of undocumented immigrants living in the country is about 22.1 million, nearly twice the most prominent current estimate of 11.3 million. Even using extremely conservative parameters, the study estimates a population of 16.7 million undocumented immigrants, nearly 50 percent higher than the widely-accepted population figure”

https://mitsloan.mit.edu/ideas-made-to-matter/study-undocumented-immigrant-population-roughly-double-current-estimate

If in fact the population estimates are between 16.7 and 22.1 million versus the commonly quoted 11.1 million, this could have a profound impact on policy decisions because the reported crime rates related to illegal immigration would be much smaller and the Total Addressable Market (TAM) for border crossing revenues would be much higher.

Total Addressable Market (TAM)

When thinking about the border as a publicly traded company we have to consider what the total addressable market (TAM) is to arrive at a revenue projection. For the border wall the TAM should be potential crossing per year. Remember this is all feasibility stuff, we’re not trying to prove statistics here. The total addressable market is made up of people who have a desire to cross the border. Every trip I make to Mexico ends with me be really sick, I’m clearly not motivated to go there. However someone in the US with family and work ties to Mexico and vice versa would be included in the TAM. We can simply look at current data on the number of crossings to arrive at a reliable number, but given that the population living in the U.S illegally is higher than previously thought means the TAM is higher. What’s more important to this exercise is that the number of fee payers is much higher than originally thought and the total addressable market for a whole variety of revenue streams is significantly higher. For the rest of this exercise I’m going to take the middle value of 20 million and add that to our total addressable market or potential border crossings to arrive at 370 million crossings per year (350 + 20). I’m assuming the 20 million in the U.S are only making two trips a year.

Efficiencies in Operations

In order to fix part of the short fall we need to get the operations much more efficient. In fact the current director has been doing just that and so have the authorities in Mexico. The time to complete a border crossing varies substantially by time or day, season, citizenship, a variety of background checks that vary by individual and whether you are walking across or driving. Walkers fill out an entry form, drivers do not; right away it seems logical to have a system where nobody fills out a form, U.S and Mexican authorities agree on that. Amazon has figured out how to let you walk into a store, pick up a head of lettuce or a can of soup, let you walk out the door and instantly your charged for those items in a seamless electronic transaction with no swiping of cards or standing in line. Given the opportunity I’m sure Amazon would love to solve border crossings too. Let’s imagine a world where there’s an electronic border that allows for the seamless, friction-less movement of people and goods across the southern border. Some would say we have that system now; I might agree except that it’s not friction-less and we’re not maximizing revenues. Now imagine that every crossing is charged a fee, just like crossing the Golden Gate Bridge. Recently our bridges have begun transitioning away from staffed toll booths to electronic toll collection. There is already a system in place to speed us all through airports and the southern border. Several Trusted Traveler Program card (NEXUS, SENTRI, Global Entry or FAST) or an Enhanced Driver's License enable travelers to cross the border more efficiently at all 48 crossings. Instead of a concrete or steel wall, let’s put up an electronic system that charges your account regardless of where you cross the border. Obviously a lot of other information would be collected at the same time for security purposes (let’s don’t get into that debate, it’s outside the focus of this post). Let’s simply imagine that if there is any conflict between the system and your identity, security vehicles are rolling to deal with that situation. A simple mandate that everyone get one of these passes would be a good step forward. Let’s add a fee to all active U.S Passports and average the total fee per year over the life of the passport. We can't assume a 100% response rate so let's assume that 90% of active passports will want a Trusted Traveler upgrade, let's call this "Border-Prime".

Border-Prime Fee: $100 ($10 per year for 10 years)

Active US Passports: 137,500,000 x 90% adoption rate = 123,750,000

123,750,000 x $10/year = $1,237,500,000 annually

As a trusted traveler with Border-Prime it’s reasonable that you should receive a discount for pre-applying and following the rules. So if you’re not a Border-Prime Member expect to pay a bit more at the border.

Non-Member Fee: $40 per crossing

Active US Passports: 137,500,000 x 10% = 13,750,000

13,750,000 x $40 x 2 = $1,100,000,000 annually (assumes 2 trips a year)

Let’s see what the budget looks like now:

Southern border Expenses: $21,680,100,000

Apprehensions expense: $ 6,078,320 non-paying crossings valued at $20 each

Sub Total $21,686,178,320

Seizures Revenues: $ 5,169,593

Current Revenues: $ 7,000,000,000 paying legal border crossings

Border-Prime Revenue: $ 1,237,500,000

New Non-Member Revenue: $ 1,100,000,000

Sub Total $ 9,342,669,593

Gross Profit/Loss ($12,343,508,727)

Obviously this isn’t good enough, investors won’t put capital into an operation that loses over $12 billion dollars a year. What is cool to consider is that just a couple of simple improvements, using systems that are already in place and policies that the CBP already wants to change have reduced the operating cost from $21.7 billion, to $12.4 billion.

Let’s take this a step further and imagine that the electronic border security and payment system is in place at all 48 crossings, and at areas where most illegal crossings occur. In theory we should be able to reduce a large portion of the staff. Employees are the most expensive part of any business as they require wages, health insurance, vacation days, sick days, space, equipment and training to do their jobs. Plus they make mistakes, we’re only human….right. So let’s imagine that through advanced automation we can reduce the number of employees and improve operating efficiencies further.

With electronic systems in place we no longer have 6 million dollars of non-paying crossings, so that figure can be removed from expenses as they are now revenue generating crossings. The $6+ million dollar expense is roughly 303,916 crossings per year, but I'll round down to account for some ongoing illegal attempts. Since these people are no longer trying to cross undetected, let's add that to our revenue stream at 2 crossings per year, but assume they don't want to be members just yet. Since border crossings are now more efficient and require fewer manual inspections we can reduce staff by say 10%.

300,000 x $40 = $12,000,000 ($40 is a bargain to someone who was paying $4,000 to a coyote)

Southern border Expenses: $ 21,680,100,000

10% reduction: $ 2,168,010,000

Sub Total: $19,512,090,000

Seizures Revenues: $ 5,169,593

Current Revenues: $ 7,000,000,000 paying legal border crossings

Border-Prime Revenue: $ 1,237,500,000

New Non-Member Revenue: $ 1,100,000,000

New Non-Member Revenue: $ 12,000,000

Sub Total $ 9,354,669,593

Gross Profit/Loss $ 10,157,420,407

As operational efficiency improves and more experience is acquired using these systems we can assume that some of the smaller border crossing facilities can dramatically reduce their staff. In some cases we might just be able to have a response team that arrives as needed. Also with greater freedom to travel back and forth let’s assume an increase in the number of border crossings by including the 20 million people that have been trying to remain undetected. Let’s reduce staff by say 20% and increase crossings by 40 million (20 million people 2x a year). Let’s also remember that we’re dealing with the U.S government, if your credit card has expired, or check bounces or you cross without your electronic ID, there will be a fee. So let’s assume that 10% of crossings are problematic, but can be handled by existing staff so these fees are in fact revenue.

Southern border Expenses: $ 19,512,090,000

20% reduction: $ 3,902,418,000

Sub Total: $ 15,609,672,000

Seizures Revenue: $ 5,169,593

Increase Revenues: $ 8,000,000,000 400 million legal border crossings