Friday, January 31, 2014

"Drilling surprise opens door to volcano-powered electricity "

From The Conversation:

Getting into hot water - one of Iceland’s geothermal power plants. Gretar Ívarsson

Can enormous heat deep in the earth be harnessed to provide energy for us on the surface? A promising report from a geothermal borehole project that accidentally struck magma – the same fiery, molten rock that spews from volcanoes – suggests it could.

The Icelandic Deep Drilling Project, IDDP, has been drilling shafts up to 5km deep in an attempt to harness the heat in the volcanic bedrock far below the surface of Iceland.

But in 2009 their borehole at Krafla, northeast Iceland, reached only 2,100m deep before unexpectedly striking a pocket of magma intruding into the Earth’s upper crust from below, at searing temperatures of 900-1000°C.

This borehole, IDDP-1, was the first in a series of wells drilled by the IDDP in Iceland looking for usable geothermal resources. The special report in this month’s Geothermics journal details the engineering feats and scientific results that came from the decision not to the plug the hole with concrete, as in a previous case in Hawaii in 2007, but instead attempt to harness the incredible geothermal heat....MORE
HT: naked capitalism

Previously on the Hot Rocks channel:
"...two kilometers or so down in most places there are these incredibly hot rocks, ’cause the interior of the earth is extremely hot, several million degrees, and the crust of the earth is hot ”
-Al Gore talking to Conan O'Brien on the Tonight Show   
Mr. Gore was not invited to join venture capitalists Kleiner, Perkins for his scientific expertise. 

Ormat taps Volcano to Generate Electricity (ORA)
 Guess who's writing off their subscription to "Journal of Volcanology and Geothermal Research"?
[this will end as badly as the time you tried to write off the "Journal of Leisure Research" -ed]

Bloomberg Appointed U.N. Climate Change/Cities Envoy

This sets up an interesting (and potentially profitable) dynamic going into the big 2015 21st Conference of the Parties in Paris,  more so than the the Sept. 2014 "Climate Summit" mentioned in the story, more to come.
From Reuters:

United Nations appoints former NYC Mayor Bloomberg cities, climate change envoy
New York City Mayor Michael Bloomberg speaks at the Conservative Party conference in Birmingham, central England October 10, 2012 in this file photo. REUTERS/Darren Staples
New York City Mayor Michael Bloomberg speaks at the Conservative Party 
conference in Birmingham, central England October 10, 2012 in this file photo. 
U.N. Secretary-General Ban Ki-moon on Friday appointed former New York City Mayor Michael Bloomberg as his special envoy for cities and climate change, in a bid to build momentum ahead of a planned U.N. conference in September.

Ban said Bloomberg will assist him in "consultations with mayors and related key stakeholders, in order to raise political will and mobilize action among cities as part of his long-term strategy to advance efforts on climate change."

Ban is seeking to re-energize the global climate change debate and boost the United Nations' role. The U.N. role for Bloomberg - a billionaire philanthropist who left office last month - was reported by Reuters on Thursday.

In a statement, Bloomberg said cities had emerged as a leading force in the battle against climate change. His appointment as U.N. special envoy is for two years.

"Cities account for more than 70 percent of global greenhouse gas emissions and two-thirds of the world's energy use today, and their total population is projected to double by 2050," Bloomberg said.
"So the steps they take now to combat climate change will have a major impact on the future of our planet. Cities have shown they have the capacity and the will to meet this challenge," he said.

Samantha Power, U.S. ambassador to the United Nations, was quick to welcome Bloomberg's appointment, posting on Twitter: "Mayor @MikeBloomberg knows how to get things done. We need more leaders like him here @UN."

Bloomberg made combating climate change a key focus during his 12 years leading the United States' most populous city. He also advocated for national climate change legislation.

Bloomberg has played a leading role in the C40 Cities Climate Leadership Group, an international group of mayors created in 2005 and dedicated to reducing greenhouse gas emissions. The C40 group, of which Bloomberg is president of the board, is to meet in Johannesburg next week....MORE

Bloomberg Speculates On 3D Printing Co. Buyouts (DDD; SSYS; AMAVF)

I have to agree with the analyst on SSYS as I daydream about what might have been with Arcam. *
From Bloomberg:

Super Bowl Cleats Signal 3-D Printer Takeovers: Real M&A 
Stratasys Ltd. (SSYS) offers Hewlett-Packard Co. (HPQ) and Seiko Epson Corp. (6724) the chance to move beyond paper-and-ink printers by acquiring a leader in the technology that’s used to replicate nuts, bolts and even football cleats.

Three-dimensional printers layer materials to create objects, technology that Nike Inc. used to help develop footwear for National Football League players to don at this weekend’s Super Bowl. Hewlett-Packard and Seiko Epson have shown interest in expanding into the fast-growing market, which may double by 2017. Rather than build their own 3-D printers, the companies would have a better shot of capturing that growth by buying Stratasys, BB&T Corp. said.

“The first machine was essentially a glue gun compared to what they do today, so to be starting from scratch is to be behind by a lot of patents and a lot of history that you have to make up,” Holden Lewis, a Reston, Virginia-based analyst at BB&T, said in a phone interview. Stratasys “would be an appealing little nugget to sort of fast-forward that process.”

While Stratasys would be a pricey purchase for a buyer with its stock near a record, the company is valued at a 33 percent discount to rival 3D Systems Corp. (DDD), according to data compiled by Bloomberg. The valuation gap makes Stratasys a more appealing target than its larger rival, FBR & Co. said. Suitors also may favor the $5.9 billion company because of its brands such as MakerBot and its greater presence in consumer markets, Credit Suisse Group AG said.

Photographer: Ariel Jerozolimski/Bloomberg
Objects manufactured by 3D printers, including a skateboard and a Smurf figurine,... Read More

Big Slice Shane Glenn, a spokesman for Stratasys, declined to comment, citing company policy, when asked whether it would be interested in a sale.

Stratasys, based in Eden Prairie, Minnesota and Rehovot, Israel, began making 3-D printers more than 20 years ago and now controls one of the largest slices of a market that generated as much as $2.9 billion in revenue worldwide last year, according to consulting firm Wohlers Associates Inc.

Global sales, including all 3-D printing products and services, may double to about $6 billion by 2017 and jump to almost $11 billion by 2021, Fort Collins, Colorado-based Wohlers Associates said. Stratasys alone may boost revenue to about $1 billion by 2016, up from an estimated $482 million in 2013, according to analysts’ projections.

The company, which acquired MakerBot in August, “would be a potentially attractive target for anyone looking to make a big splash within the space,” Angelo Zino, a New York-based analyst at S&P Capital IQ, said in a phone interview. “It instantly gives you a huge presence in the 3-D printing market.”

Photographer: Ariel Jerozolimski/Bloomberg
A visitor approaches the entrance to the offices of Stratasys Ltd., manufacturer of 3D... Read More

Boeing, Nike

Stratasys’s customers include Boeing Co., (BA) Ford Motor Co., Boston Scientific Corp. (BSX) and Nike, according to a September filing. Nike declined to identify what type of 3-D printing technology it used to develop the football cleats that inspired the shoes for the Super Bowl.

While some larger technology companies are beginning to move into 3-D printing, “it’s certainly a high-risk strategy to do this from scratch internally, and it takes a lot of time,” Ajay Kejriwal a New York-based analyst at FBR, said in a phone interview....MORE
*From our December post "Whitney Tilson on Shorting 3D Systems (DDD)":
He's right,
...If you look at each company's recent acquisitions, Makerbot for DDD and Objet for SSYS, there's no comparison on who has the smarter long term strategy.
Now if only Stratasys would buy Arcam...
which, of course, referred to this little beauty:
Chart forArcam AB (AMAVF)

...We first mentioned the company in September 2012. The stock was at $10.28 and traded by appointment only. It closed Friday at $113.26.
That was from our September 2013 post "Credit Suisse Initiates On 3D Printer Co's: '3D printing will change the world'". The 4:1 split puts the old stock at $173.80.
And the "might-have-been"? From October's "GE: 3D Printing Will 'Touch' Over Half Its Manufacturing":
...As with nanotechnology the most interesting portfolio investments will end up being not the 3D printer manufacturers but the companies that use the tech to gain a competitive advantage.
Still wish I'd put together a buyout for Arcam though.

Smartest Headline of the Day: "No, regulatory evasion isn’t ‘disruptive innovation’"

Sometimes it's really, really important to call a spade a "AA 59337:1998 Intrenching tool, hand, folding, lightweight [supersedes ARMY MIL-I-43684 B]

From FT Alphaville:
Felix Salmon at Reuters sums up the problem with a lot of “disruptive” innovation these days.
It’s not really all that innovative — but rather focused on finding ever cleverer and more subtle ways of dodging established regulations, which, as he also points out, exist for a reason.

Should it therefore be surprising that the likes of Airbnb, Uber and even Bitcoin are more cost effective than established competitors when they’re either cutting out the taxman or costs of compliance altogether? How can regulated industry possibly hope to compete?

Which also confuses, if not exploits, the ethos of the sharing economy in and of itself.

Home swapping, for example, is the sharing economy. It works because two parties partake in an exchange in kind. The exchange maximises and expands the reach and utility of an existing asset, to the owner’s direct benefit.

Renting out a spare room for money, which might have been too costly to market before, is partaking in the hotelier industry, and means expanding the reach of your asset to a third party.
The morale of the story being it’s only really a peer-to-peer innovation if no money is swapped at any given time, even a minimal sum. Everything else is tantamount to exploiting collective organisation for the purpose of rent extraction, regulatory evasion or tax dodging. Hence why it lends itself so well to Silicon Valley libertarian ideals.

Salmon, in any case, sums it up really well here:
From the point of view of Silicon Valley libertarians, the idea that they’re disrupting a long-established flow of public monies is a feature, not a bug. If you threaten their disruptive business models, you’re threatening their freedom! That’s the message being sent quite explicitly by the mild-mannered Fred Wilson; his west-coast counterparts, like Balaji Srinivasan and Peter Thiel, have a tendency to go even further.
In finance, regulation is very important indeed — if you want to prevent everything from terrorist finance to global financial meltdown, central authorities need to be able to keep tabs on all financial flows....MORE
Somebody's got to be the kid who says "The Emperor is without raiment".
Thank you to Izabella for the link. Clear speech for clear thinking. And possibly the Latin name for the Roman battle shovel to boot.

Politico: The President's Executive Action and Regulatory Agenda

For those who try to avoid the muck of U.S. political commentary, Politico leans left, although you couldn't tell that from this series of what appears to be actual journalism. Thanks to the reader who brought it to my attention.
From Politico Pro:

Obama’s power play
Barack Obama and the series logo are shown. | M.Scott Mahaskey/iStock Photos
Part of a POLITICO Pro Special Report series on the Obama administration’s executive action and regulatory agenda.

In an FDA office building in suburban Maryland, the bureaucrats gather over coffee to draft rules meant to squeeze the trans fat out of snack foods.

Four blocks from the White House, in an EPA conference room: more bureaucrats, more meetings, more drafting of rules, these aimed at forcing industrialists to spend billions cutting carbon to fend off global warming.

Congress? Who needs Congress?

Americans heard President Barack Obama declare this week that he intends to bypass the gridlocked Hill to get things done on his own. What they didn’t hear: just how far he’s actually pushing his executive authority.

An in-depth examination of the administration’s actions and plans, agency by agency, regulation by regulation, reveals an executive power play that’s broad and bold — and intensely ambitious. Far more than he let on in the State of the Union, the president has marshaled the tools of his office to advance policies, many unabashedly liberal, that push deep into everyday life for tens of millions of Americans.

He wants to change how power plants operate. And what we buy for lunch. How we travel to work. And how our kids learn math. How our gasoline is formulated. How we light our aquariums.

Already, the president’s team has enacted 300 economically significant regulations, far more than Bill Clinton, George W. Bush or Ronald Reagan did in comparable periods. Some of those rules are driven by the Affordable Care Act and Dodd-Frank banking reform, the two big laws Obama pushed through Congress early in his first term, when he had Democratic majorities in both houses. But there is far more.

When Congress wouldn’t support a climate change bill, the administration moved on its own to push the energy industry away from coal and toward green alternatives. The executive branch found a way to drive tremendous change in public schools, too — though education is typically under local control — by holding tight to billions in much-needed funding, and doling it out only to states that pledged to follow the administration’s prescriptions for reform. A tweak to a transportation grant formula even gave the administration influence over local urban planning; streetcars, all of a sudden, are popping up everywhere.
And it’s not Congress, but the executive branch, that’s on the verge of making Hershey’s reformulate its Reese’s Pieces. (Out, out, trans fat!)

As he tees up for his final three years, Obama is pushing to take his executive power further still, with the most ambitious regulatory agenda in decades. Executive actions now underway could shut down for-profit colleges that don’t meet the administration’s definition of success — even if they’re popular with students. They could raise the price of products ranging from trucks to furnace fans to manufactured housing to aquarium lights, by requiring them to be made more energy-efficient. The executive agenda even reaches the fires of the family hearth, with the Environmental Protection Agency planning strict new requirements for home wood stoves.

Whether American guns can be sold abroad. How smokeless tobacco can be marketed. Which nonprofits can stage get-out-the-vote drives. What constitutes a single serving of potato chips.
And, perhaps, just how salty those chips should be.

All this, and much more, will depend in large part on the behind-the-scenes churning of the federal bureaucracy — managed, or by many accounts micro-managed, by the White House.

Obama has pushed back on complaints from business leaders that he is overstepping and overregulating. His staff notes that Obama has issued fewer executive orders than previous presidents and describes his approach to regulation as pragmatic. “The president does not believe that we have to choose between protecting the health, welfare and safety of Americans and promoting economic growth, job creation, competitiveness and innovation,” White House spokesman Jay Carney said. “We can do both and we are doing both.” Allies agree, saying with Congress mired in gridlock, executive action is vital. “We face a lengthy to-do list of public health and safety priorities,” said Gynnie Robnett, of the Center for Effective Government. Opponents, however, blast Obama for arrogant overreach....MUCH MORE
Also at Politico: "Why the rich are freaking out".

See also our Tuesday post: "Ahead of the SOTU: The List of Unilateral Actions President Obama May Take on Climate and Energy or How To Make Money Off This Stuff"

"US Treasury Spending vs. SP500 Sales" (where did the money go?

From Mike Norman Economics:
Chart below that depicts leading US Treasury spending vs. SP500 Sales vs SP500 earnings over the recent long term in time domain.

Of interest is the linearity in the growth of both Treasury spending and SP500 sales over the time period leading up to the "GFC" in 2008, about from the years 2001 thru 2007.

While if we look at the below chart depicting the growth in the Fed's H.8 Loans and Leases in Bank Credit over this same time period that we showed here last week, we can see the NON-linearity of the growth in the establishment of these balances over this same time period.
So even though bank credit was growing exponentially, we can see no exponential growth in sales by firms over this same time period.

This observation might make one want to wonder: "Where did the money go?"....MORE

Natural Gas Producers Not Yet Taking the Bait of Higher Prices: Rig Count For Gas Drillers Hits Multi-decade Low

After getting clobbered yesterday (following Wednesday's 10%+ up move) the new front futures (March) are down another 13 cents at $4.881.
The closing settlement on the February's was $5.557 after trading over $5.70 in their last hour of life.
The Baker Hughes rig count via WTRG Economics:
North American Rotary Rig Counts
The U.S. rotary rig count was unchanged at 1,777 for the week of January 24, 2014. It is 28 rigs (1.4%) higher than last year.

The number of rotary rigs drilling for oil was up 8 at 1,416. There 101 more rigs targeting oil than last year. Rigs drilling for oil represent 79.7 percent of all drilling activity. 
Rigs directed toward natural gas were down 9 at 356. The number of rigs currently drilling for gas is 78 lower than last year's level of  429.
Year-over-year oil exploration in the U.S. is up 7.7 percent. Gas exploration is down 18.0 percent. The weekly average of crude oil spot prices is 0.5 percent lower than last year and natural gas spot prices are 40.1 percent higher than last year. Daily crude oil and natural gas futures and spot prices are available on our site.

Canadian rig activity is up 25 at 590 for the week of January 24, 2014 and is 31 (5.0%) lower than last year's rig count. The number of rigs drilling for oil was up 15 at 394 and is 80 (16.9%) lower than last year. Gas directed rig count at 196 is up 10 and is 49 rigs (33.3%) higher than last year. Canadian drilling falls rapidly in the spring to avoid environmental damage moving drilling equipment during the spring thaw and rainy season. With wide weather related seasonal swings, even year-over-year comparisons can lead to incorrect conclusions.
North American Rig Count
Percent Change

01/24/2014 01/17/2014 01/25/2013 Weekly Annual Weekly Annual
Total U.S. 1,777 1,777 1,753 0 24 0.0% 1.4%
Offshore 56 57 52 (1) 4 -1.8% 7.7%
Land 1,721 1,720 1,701 1 20 0.1% 1.2%
Inland Waters 20 20 18 0 2 0.0% 11.1%
Oil 1,416 1,408 1,315 8 101 0.6% 7.7%
Percent 79.7% 79.2% 75.0% 0.5% 4.7%

Gas 356 365 434 (9) (78) -2.5% -18.0%
Percent 20.0% 20.5% 24.8% -0.5% -4.7%

Directional 211 219 181 -8 30 -3.7% 16.6%
Horizontal 1,170 1,173 1,127 -3 43 -0.3% 3.8%
Vertical 396 385 445 11 -49 2.9% -11.0%
Gulf of Mexico 56 55 51 1 5 1.8% 9.8%
Gulf Oil 40 40 37 0 3 0.0% 8.1%
Percent 71.4% 72.7% 72.5% -1.3% -1.1%

Gulf Gas 16 15 14 1 2 6.7% 14.3%
Percent 28.6% 27.3% 27.5% 1.3% 1.1%

Canada 590 565 621 25 (31) 4.4% -5.0%
Oil 394 379 474 15 (80) 4.0% -16.9%
Percent 66.8% 67.1% 76.3% -0.3% -9.5%

Gas 196 186 147 10 49 5.4% 33.3%
Percent 33.2% 32.9% 23.7% 0.3% 9.5%

North America 2,367 2,342 2,374 25 (7) 1.1% -0.3%
Oil $/bbl. $96.32 $93.34 $95.83 $2.98 $0.49 3.2% 0.5%
Oil $/mmbtu $16.61 $16.09 $16.52 $0.51 $0.08 3.2% 0.5%
Gas $/mmbtu $4.93 $4.38 $3.52 $0.56 $1.41 12.7% 40.1%
Monthly: International Rig Counts...

You have to go back to 1995 to see that small a number of rigs directed at gas:

In October the EIA pointed out, in "Rethinking rig count as a predictor of natural gas production", that because of horizontal drilling and fracking the numbers aren't directly comparable but a trend is still a trend.
See also the intro to "Natural Gas Prices Strongly Higher on Arrival of Cold Spell" for some discussion of the interplay between prices and drilling.

Thursday, January 30, 2014

What You'd Better Know About the Concentrating Power of Technology (GOOG)

We dropped in on one of the Davos bigwigs last week:
“The race is between computers and people and the people need to win ... In this fight, it is very important that we find the things that humans are really good at,”
-Eric Schmidt, executive chairman of Google

as quoted in the FT editorial "Automation and the threat to jobs" on the Davos gang and their public comments.

And I started laughing.

And laughing.

Because this is the same guy who conspired with Apple's Steve Jobs to suppress wages in Silicon Valley, see, if interested, "Collusion: How Apple, Google, Intel and Adobe Agreed to Suppress Employee Pay" from last October.

So I don't take what he says about people as people very seriously.
This, on the other hand, looks very serious...
From FT Alphaville:

Google, defender of the universe
From Huffington Post’s Bianca Bosker this week regarding Google’s acquisition of DeepMind, with regards to the latter’s concern that artificial intelligence poses an extinction level threat for humanity:
Google’s acquisition of DeepMind came with an estimated $400 million price tag and an unusual stipulation that adds extra gravity — and a dose of reality — to Legg’s warning: Google agreed to create an AI safety and ethics review board to ensure this technology is developed safely, as The Information first reported and The Huffington Post confirmed. (A Google spokesman said that DeepMind had been acquired, but declined to comment further.)
Though, as Bosker points out, what’s really interesting is that Google seems so much more concerned about Asimovian AI morality than about the ethics of reading your email. Never mind.

That Google is also developing a robot (killer?) army on the side does have a certain Star Wars “Attack of the Clones” feel about it, though — especially in the context of Eric Schimdt’s own warning at Davos about the general automation threat to ever more jobs. What exactly are they planning?

Which leads to another point. We’ve discussed the tendency for technology companies (and all companies, for that matter) to trend towards monopolisation and how generally all free-market roads do — unless intercepted by evil socialist government — lead to a “there can be only one” type monopoly winner. That or the most disciplined of disciplined cartels.

That was scary back in the days of John D. Rockefeller, Standard Oil and Ida Tarbell.

But what we’re dealing with now is arguably a new level of scary entirely. Google has transcendentalists like Ray Kurzweil on their payrolls openly pursuing eternal “cloud-based” life, robot armies and AI — most of it, if not all, facilitated by their exclusive ownership and access to an ever growing global organic dataset (G.O.D.), that one day has the capacity to be all-knowing not only about the here and now, but about the probability of your consuming a cheese sandwich at tea-time next Thursday.

Google has plenty of cash to play with, and bored cash-rich companies that don’t really care about returns can invest in the craziest of things. This is especially so if they have the power to mint their own cash in the form of overly inflated stock prices...MORE
Now all they need are some Rhine castles to extract tolls on the commerce going by....

U.K. Report Finds People In England More Likely to Find Work If They Speak English

What would we do without research?
From Real Time Economics:
How’s this for an unsurprising statistic? People in England are more likely to get work if they can speak English.

The not-so-shocking nugget of information was published Wednesday by the Office for National Statistics, following analysis of the 2011 census, a once-a-decade survey of the population.

Admittedly, statistics often confirm things we already know. The ONS report at least gives some pretty specific figures on how important it is to command the U.K.’s official language when seeking a job.

Of the 46 million adults in England and Wales who filled in the 2011 census, 1.7% — just under 800,000 people — spoke English “not well” or “not at all.”* They were at a significant disadvantage in finding a job, with an employment rate of 48%, compared with 65% for those who have picked up a decent level of English and 72% for whom it is their main language.

The ONS is seeking to strip down the number of data releases it publishes in an attempt to cut costs as part of the U.K. government’s austerity drive. A one-off release such as this, which mostly confirms the obvious, might raise eyebrows....MORE

Has Carl Icahn Been Trying to Manipulate Apple's Stock Price (AAPL)

Of course he has.
The stock is down a little bit more pre-market, $499.40, off $1.35.
From Testosterone Pit:

Icahn’s “No-Brainer” Goes To Heck (Manipulation Works Only Most Of The Time)
So things have been a little rough for our tech heroes the last few days. Yahoo reported Tuesday evening that revenues last quarter had dropped again from a year earlier. The stock got hammered after hours. VM reported that revenues were up 15%. Stock got hammered. Seagate reported that revenues were down 3.8%. Stock got hammered and ended 11.2% lower. But the standout was Apple. On Monday evening, it reported very uninspiring results.

Carl Icahn must have tossed and turned Monday night. Still reeling from his Apple losses, he was out there on Tuesday hyping the stock with all his might. They're all doing it, from Warren Buffett on down, guys with billions of play-money and a loud voice that bounces around the media in a myriad ways so that no one can escape their hype.

A whole industry has formed around them – the Buffett and Icahn watchers, whose recommendations, newsletters, and model portfolios claim to mirror the successes of the Great Ones. They entice the little guy to jump on the bandwagon and multiply the effects of the early movements to drive up the stock further.
These Great Ones buy quietly, which itself, given the amounts involved, moves the stock. Then carefully engineered rumors spread, which drive up the stock further. This is followed by an official disclosure – in Icahn’s case, on Twitter – which is picked up by all the Icahn watchers and the media, and the ensuing hoopla, the interviews, the quotes, the articles in The Wall Street Journal, the pithy pronouncements on Twitter drive up the stock further as individual investors jump into the fray. They all give the Great Ones an opportunity to proclaim why a company is a “no-brainer,” and why the stock should surge, or why a stock that swooned – like Apple – shouldn’t have....MORE

Here Is The Paper "How Unlucky Is 25 Sigma?" (25 Standard Deviation Moves Basically Don't Happen)

In the post immediately below, "Natural Gas: 'Someone Just Got Amaranth'd'" I had linked to a working paper version that is no longer on the net.
Note to self: Check the link before hitting "Publish".
How Unlucky is 25-Sigma?
Kevin Dowd, John Cotter, Chris Humphrey and Margaret Woods
March 24 2008
1. Introduction

One of the more memorable moments of last summer’s credit crunch came when the CFO of Goldman Sachs, David Viniar, announced in August that Goldman’s flagship GEO hedge fund had lost 27% of its value since the start of the year. As Mr. Viniar explained, “We were seeing things that were 25-standard deviation moves, several days in a row.”

One commentator wryly noted: That Viniar. What a comic. According to Goldman’s mathematical models, August, Year of Our Lord 2007, was a very special month. Things were happening that were only supposed to happen once in every 100,000 years. Either that ... or Goldman’s models were wrong (Bonner, 2007b). But sadly Goldman were not alone. In 2007 alone, massive losses were announced by Bear Stearns, UBS, Merrill Lynch and Citigroup, and then there were the earlier financial disasters – 1987, Daiwa, Barings, Long-Term Capital, the dotcoms, Russia, East Asia, and so on – and afterwards Société Générale and Bear Stearns again in early 2008, with rumours of more yet to come. Citi’s case was particularly interesting....MORE (7 page PDF)

Wednesday, January 29, 2014

UPDATED--Natural Gas: "Someone Just Got Amaranth'd"

Update: had a dead link on the paper "How unlucky is 25 sigma".
This one works.
Original post:
As noted on Monday:
Since natural gas is, at least on the blog, untradable -up 9.6% on Friday, ranging between $5.44 and $4.83 today, today-we'll check in on some of the current craziness in natural gas liquids....
From ZeroHedge (Wednesday):
Natural Gas futures prics are exploding higher... By now everyone is quite aware of the US climatic conditions so whatever squeeze just took place has nothing to do with fundamentals, and everything to do with someone being Amaranth'd. The only question is who, and who is their counterparty (especially if it is a public company).
March Futures
and Feb Futures

The last 3 days in NG is +9.6%, -6.5%, and today +10.4% - these are 5 sigma swings!!
Much as I'd like to give the impression that natty is experiencing 5-sigma moves and that's why we stepped aside, ZeroHedge is incorrect.

As we learned when fact-checking Goldman's David Viniar back in August 2007:
“We were seeing things that were 25-standard deviation moves, several days in a row”....
Several folks, when they finally quit laughing, pointed out how blatently Mr. V was spinning.
Most however underestimated how infrequent 25SD events are, the most common guess being once in 100,000 years. Tee hee.

In a snappy little eight page paper "How Unlucky is 25 Sigma" we see that at 7 Sigma the odds are:

• a 7-sigma event is to be expected every 7.76e+11 days – the number of zero
digits is so large that Excel now reports the number of days using scientific
notation, and this number is to be interpreted as 7.76 days with decimal point
pushed back 11 places. This frequency corresponds to 1 day in 3,105,395,365
The 5-sigma event:
• a 5-sigma event is to be expected every 3,483,046 days or about 1 day every
13,932 years(!!)

Financials Leading the Way Down (C; GS; TRV; XLF)

Not a good sign.
From Barron's Getting Technical column:
Citi, Goldman, Travelers and other big financial companies have lost their mojo, and are falling faster than the market. That's a bad sign.

Quality leadership is always important in a healthy stock market. When financial stocks finally ascended to that role a few weeks ago to join the technology sector, the outlook brightened considerably. But it was not to last, and many financial stocks, from banks to insurance, have fallen quite sharply. Without financials, the market has lost an engine, and that spells trouble.

The Select Sector SPDR Financial exchange-traded fund (ticker: XLF) is down only about 4.5% from its Jan. 15 high versus about 3.5% for the Standard & Poor's 500, but its position relative to the market has changed. Specifically, the trend of improving performance in place since November is broken (see Chart 1).

Chart 1

Select Sector SPDR Financial ETF
Throughout the rally following the last significant market correction in mid-2011, the stock market moved nicely higher when financials were in the lead and stumbled when they were not. With the latter condition back in force, we now have evidence that stocks are in for a bumpy ride.

It is far from a bear market signal because both the S&P 500 and the financial ETF are sitting on important support levels, but there is little room for error. If the ETF drops below Monday's low of $20.86, it will have little in the way of an additional 7.5% drop to support near $19.40 set by August and October lows and a critical long-term trendline drawn from October 2011. It traded at $21.07 Wednesday afternoon.
Within the group, insurance stocks of every type are leading to the downside. For example, property and casualty insurer Travelers (TRV), a member of the Dow Jones Industrial Average, is down nearly 9% year-to-date and moved below its own October 2011 trendline. While currently oversold in the short term, the long-term bull run is clearly over.

What is probably more frightening for the bulls is the recent breakout failure in the bank group. Citigroup (C) started the month by rallying above an eight-month resistance level, but within a few days it collapsed back down below it (see Chart 2)....MORE

Chartology: "$LUMBER Starts To Slumber"

From StockCharts:
$LUMBER has been a great story for the last 5 years. However, the roller coaster has been difficult for investors to watch. It's been a traders market. This week, we got a signal on the $LUMBER chart.
$LUMBER 20140129
The slope of the recent rise has been a lot more gradual than the slope of the 2012 rise. Importantly, $LUMBER looks set to roll over here with a confirmed cross on the MACD after the momentum flattened out in November and December.
Good trading,
Greg Schnell, CMT

Oil: Will Iraq and Iran Flood the Market to Punish Saudi Arabia?

Don't underestimate Shia/Sunni hatred.
From The Telegraph:
Iraq's goal of pumping 9m barrels a day of crude could be a game changer for oil prices and British companies

Iraq is poised to flood the oil market by tripling its capacity to pump crude by 2020 and is collaborating with Iran on strategy in a move that will challenge Saudi Arabia's grip on the Organisation of Petroleum Exporting Countries.
"We feel the world needs to be assured of fuel for economic growth," Hussain al-Shahristani, Deputy Prime Minister for Energy in Iraq told oil industry delegates attending a Chatham House Middle East energy conference.
Al Shahristani said on Tuesday that Iraq plans to boost its capacity to produce oil to 9m barrels a day (bpd) by the end of the decade as Baghdad rushes to bolster its economy, which is still shattered by war and internal conflict. Iraq was producing 3m bpd in December, according to the International Energy Agency.
Iraq's intention to challenge Saudi Arabia's status as the "swing producer" in the OPEC cartel could see a dramatic fall in oil prices if Baghdad decides to break the group's quotas and sell more of its crude on the open market.
"It's very difficult to predict actual world (oil) demand by 2020 because the world economy is unpredictable," said Mr al-Shahristani.

British oil giants BP and Royal Dutch Shell are also poised to benefit from Iraq's ambitious production plans. Both companies are already managing two huge oil fields in southern Iraq which are vital if Baghdad is to achieve its goal.

However, even if Iraq is able to achieve its target of boost production capacity it is unlikely to be able to put in place sufficient pipeline and port infrastructure to export the additional crude.

Iraq's main export terminal for loading oil tankers at Al Faw near Basra will require billions of pounds worth of improvements in addition to the refurbishment of its pipeline network.

Iraq's ambitious plan could see it clash increasingly with the regime in Saudi Arabia, which has used its influence in OPEC over the last decade to keep oil prices above $100 a barrel. Saudi itself is now under pressure to boost output to maintain market share. The kingdom pumped 9.8m bpd in December up by about 100,000 barrels from the previous month.

Experts say that attention within OPEC, which pumps 30pc of the world's crude, could increasingly focus on compliance with more of the group's members tempted to pump more barrels to protect their share of the market as the cartel grapples with the rise of US shale oil production.

OPEC agreed in early December to renew for six months its 30m bpd output cap for the first half of the year to keep prices above $100. However, quotas have in the past proved difficult for OPEC as a group to enforce without any binding penalties for over-producing. Since its restoration to OPEC following the 2003 Gulf War, Iraq has been excluded from the group's quota system to allow its economy to recover but pressure is mounting for it to comply this year.

The International Monetary Fund this week warned that Iraq's weak economy remains vulnerable to fluctuations in oil markets. Crude oil exports account for 93pc of government revenues. The IMF estimated that Baghdad required an average oil price of $106.1 per barrel in 2013 to balance its budget, up from $95 in 2011 because of higher spending.

Despite Mr al-Shahristani's hopes for boosting Iraq's energy sector there are severe concerns over security amid fears the country may again be slipping toward a civil war between Sunni and Shia Muslim factions.
In a further challenge to Saudi Arabia, which is mostly closed to international oil companies, Mr al-Shahristani revealed that Baghdad is working with Iran to help it attract investment ahead of the possible lifting of sanctions. Oil companies are understood to be queuing up to win Iranian oil deals.

"Iran has been in touch with us," said Mr al-Shahristani. "They want to share our contracts model and experience."

Combined, Iran and Iraq hold greater reserves of oil than Saudi Arabia and the potential with the help of international investment to match its capacity to produce oil, which currently stands at around 12.5m b/d of crude.

"Climate change: The case of the missing heat"

A few years after the Pacific Decadal Oscillation was described in the literature back in the late-90's a pretty sharp guy, one of those 187 I.Q. freaks of nature, told me to watch the oceans. He simplified things for me by pointing out that, because of its density and volume, the amount of heat required to raise the temperature of the oceans by a uniform 1°F would, if released into the atmosphere, raise the air temperature by 1000°(no typo).

So I have. For quite a while we were one of the few sites even making mention of the PDO and its Atlantic counterpart the Atlantic Multidecadal Oscillation. Some (we have many) links below.
This is just a small part of the whole story of what goes on in climate and weather but if you ignore it you will lose money in the markets we look at on the blog. Guaranteed.

From the journal Nature :

Sixteen years into the mysterious ‘global-warming hiatus’, scientists are piecing together an explanation.

15 January 2014
Tim Graham/Robert Harding Picture Library
The Pacific Ocean may hold the key to understanding why global warming has stalled.
The biggest mystery in climate science today may have begun, unbeknownst to anybody at the time, with a subtle weakening of the tropical trade winds blowing across the Pacific Ocean in late 1997. These winds normally push sun-baked water towards Indonesia. When they slackened, the warm water sloshed back towards South America, resulting in a spectacular example of a phenomenon known as El Niño. Average global temperatures hit a record high in 1998 — and then the warming stalled.
For several years, scientists wrote off the stall as noise in the climate system: the natural variations in the atmosphere, oceans and biosphere that drive warm or cool spells around the globe. But the pause has persisted, sparking a minor crisis of confidence in the field. Although there have been jumps and dips, average atmospheric temperatures have risen little since 1998, in seeming defiance of projections of climate models and the ever-increasing emissions of greenhouse gases. Climate sceptics have seized on the temperature trends as evidence that global warming has ground to a halt. Climate scientists, meanwhile, know that heat must still be building up somewhere in the climate system, but they have struggled to explain where it is going, if not into the atmosphere. Some have begun to wonder whether there is something amiss in their models.
Now, as the global-warming hiatus enters its sixteenth year, scientists are at last making headway in the case of the missing heat. Some have pointed to the Sun, volcanoes and even pollution from China as potential culprits, but recent studies suggest that the oceans are key to explaining the anomaly. The latest suspect is the El Niño of 1997–98, which pumped prodigious quantities of heat out of the oceans and into the atmosphere — perhaps enough to tip the equatorial Pacific into a prolonged cold state that has suppressed global temperatures ever since.

“The 1997 to ’98 El Niño event was a trigger for the changes in the Pacific, and I think that’s very probably the beginning of the hiatus,” says Kevin Trenberth, a climate scientist at the National Center for Atmospheric Research (NCAR) in Boulder, Colorado. According to this theory, the tropical Pacific should snap out of its prolonged cold spell in the coming years.“Eventually,” Trenberth says, “it will switch back in the other direction.”
Stark contrast On a chart of global atmospheric temperatures, the hiatus stands in stark contrast to the rapid warming of the two decades that preceded it. Simulations conducted in advance of the 2013–14 assessment from the Intergovernmental Panel on Climate Change (IPCC) suggest that the warming should have continued at an average rate of 0.21 °C per decade from 1998 to 2012. Instead, the observed warming during that period was just 0.04 °C per decade, as measured by the UK Met Office in Exeter and the Climatic Research Unit at the University of East Anglia in Norwich, UK.

The simplest explanation for both the hiatus and the discrepancy in the models is natural variability. Much like the swings between warm and cold in day-to-day weather, chaotic climate fluctuations can knock global temperatures up or down from year to year and decade to decade. Records of past climate show some long-lasting global heatwaves and cold snaps, and climate models suggest that either of these can occur as the world warms under the influence of greenhouse gases.
But none of the climate simulations carried out for the IPCC produced this particular hiatus at this particular time. That has led sceptics — and some scientists — to the controversial conclusion that the models might be overestimating the effect of greenhouse gases, and that future warming might not be as strong as is feared. Others say that this conclusion goes against the long-term temperature trends, as well as palaeoclimate data that are used to extend the temperature record far into the past. And many researchers caution against evaluating models on the basis of a relatively short-term blip in the climate. “If you are interested in global climate change, your main focus ought to be on timescales of 50 to 100 years,” says Susan Solomon, a climate scientist at the Massachusetts Institute of Technology in Cambridge.

But even those scientists who remain confident in the underlying models acknowledge that there is increasing pressure to work out just what is happening today. “A few years ago you saw the hiatus, but it could be dismissed because it was well within the noise,” says Gabriel Vecchi, a climate scientist at the US National Oceanic and Atmospheric Administration’s Geophysical Fluid Dynamics Laboratory in Princeton, New Jersey. “Now it’s something to explain.”

Researchers have followed various leads in recent years, focusing mainly on a trio of factors: the Sun1, atmospheric aerosol particles2 and the oceans3. The output of energy from the Sun tends to wax and wane on an 11-year cycle, but the Sun entered a prolonged lull around the turn of the millennium. The natural 11-year cycle is currently approaching its peak, but thus far it has been the weakest solar maximum in a century. This could help to explain both the hiatus and the discrepancy in the model simulations, which include a higher solar output than Earth has experienced since 2000.

An unexpected increase in the number of stratospheric aerosol particles could be another factor keeping Earth cooler than predicted. These particles reflect sunlight back into space, and scientists suspect that small volcanoes — and perhaps even industrialization in China — could have pumped extra aerosols into the stratosphere during the past 16 years, depressing global temperatures.

Some have argued that these two factors could be primary drivers of the hiatus, but studies published in the past few years suggest that their effects are likely to be relatively small4, 5. Trenberth, for example, analysed their impacts on the basis of satellite measurements of energy entering and exiting the planet, and estimated that aerosols and solar activity account for just 20% of the hiatus. That leaves the bulk of the hiatus to the oceans, which serve as giant sponges for heat. And here, the spotlight falls on the equatorial Pacific.

Blowing hot and cold
Just before the hiatus took hold, that region had turned unusually warm during the El Niño of 1997–98, which fuelled extreme weather across the planet, from floods in Chile and California to droughts and wildfires in Mexico and Indonesia. But it ended just as quickly as it had begun, and by late 1998 cold waters — a mark of El Niño’s sister effect, La Niña — had returned to the eastern equatorial Pacific with a vengeance. More importantly, the entire eastern Pacific flipped into a cool state that has continued more or less to this day.

Just before the hiatus took hold, that region had turned unusually warm during the El Niño of 1997–98, which fuelled extreme weather across the planet, from floods in Chile and California to droughts and wildfires in Mexico and Indonesia. But it ended just as quickly as it had begun, and by late 1998 cold waters — a mark of El Niño’s sister effect, La Niña — had returned to the eastern equatorial Pacific with a vengeance. More importantly, the entire eastern Pacific flipped into a cool state that has continued more or less to this day.
This variation in ocean temperature, known as the Pacific Decadal Oscillation (PDO), may be a crucial piece of the hiatus puzzle. The cycle reverses every 15–30 years, and in its positive phase, the oscillation favours El Niño, which tends to warm the atmosphere (see ‘The fickle ocean’). After a couple of decades of releasing heat from the eastern and central Pacific, the region cools and enters the negative phase of the PDO. This state tends towards La Niña, which brings cool waters up from the depths along the Equator and tends to cool the planet. Researchers identified the PDO pattern in 1997, but have only recently begun to understand how it fits in with broader ocean-circulation patterns and how it may help to explain the hiatus.

One important finding came in 2011, when a team of researchers at NCAR led by Gerald Meehl reported that inserting a PDO pattern into global climate models causes decade-scale breaks in global warming3. Ocean-temperature data from the recent hiatus reveal why: in a subsequent study, the NCAR researchers showed that more heat moved into the deep ocean after 1998, which helped to prevent the atmosphere from warming6. In a third paper, the group used computer models to document the flip side of the process: when the PDO switches to its positive phase, it heats up the surface ocean and atmosphere, helping to drive decades of rapid warming7.

A key breakthrough came last year from Shang-Ping Xie and Yu Kosaka at the Scripps Institution of Oceanography in La Jolla, California. The duo took a different tack, by programming a model with actual sea surface temperatures from recent decades in the eastern equatorial Pacific, and then seeing what happened to the rest of the globe8. Their model not only recreated the hiatus in global temperatures, but also reproduced some of the seasonal and regional climate trends that have marked the hiatus, including warming in many areas and cooler northern winters.

“It was actually a revelation for me when I saw that paper,” says John Fyfe, a climate modeller at the Canadian Centre for Climate Modelling and Analysis in Victoria. But it did not, he adds, explain everything. “What it skirted was the question of what is driving the tropical cooling.”

That was investigated by Trenberth and John Fasullo, also at NCAR, who brought in winds and ocean data to explain how the pattern emerges4. Their study documents how tropical trade winds associated with La Niña conditions help to drive warm water westward and, ultimately, deep into the ocean, while promoting the upwelling of cool waters along the eastern equatorial region. In extreme cases, such as the La Niña of 1998, this may be able to push the ocean into a cool phase of the PDO. An analysis of historical data buttressed these conclusions, showing that the cool phase of the PDO coincided with a few decades of cooler temperatures after the Second World War (see ‘The Pacific’s global reach’), and that the warm phase lined up with the sharp spike seen in global temperatures between 1976 and 1998 (ref. 4).
“I believe the evidence is pretty clear,” says Mark Cane, a climatologist at Columbia University in New York. “It’s not about aerosols or stratospheric water vapour; it’s about having had a decade of cooler temperatures in the eastern equatorial Pacific.”

Heated debate
Cane was the first to predict the current cooling in the Pacific, although the implications weren’t clear at the time. In 2004, he and his colleagues found that a simple regional climate model predicted a warm shift in the Pacific that began around 1976, when global temperatures began to rise sharply9. Almost as an afterthought, they concluded their paper with a simple forecast: “For what it is worth the model predicts that the 1998 El Niño ended the post-1976 tropical Pacific warm period.”

It is an eerily accurate result, but the work remains hotly contested, in part because it is based on a partial climate model that focuses on the equatorial Pacific alone. Cane further maintains that the trend over the past century has been towards warmer temperatures in the western Pacific relative to those in the east. That opens the door, he says, to the possibility that warming from greenhouse gases is driving La Niña-like conditions and could continue to do so in the future, helping to suppress global warming. “If all of that is true, it’s a negative feedback, and if we don’t capture it in our models they will overstate the warming,” he says.

There are two potential holes in his assessment. First, the historical ocean-temperature data are notoriously imprecise, leading many researchers to dispute Cane’s assertion that the equatorial Pacific shifted towards a more La Niña-like state during the past century10. Second, many researchers have found the opposite pattern in simulations with full climate models, which factor in the suite of atmospheric and oceanic interactions beyond the equatorial Pacific. These tend to reveal a trend towards more El Niño-like conditions as a result of global warming. The difference seems to lie, in part, in how warming influences evaporation in areas of the Pacific, according to Trenberth. He says the models suggest that global warming has a greater impact on temperatures in the relatively cool east, because the increase in evaporation adds water vapour to the atmosphere there and enhances atmospheric warming; this effect is weaker in the warmer western Pacific, where the air is already saturated with moisture.

Scientists may get to test their theories soon enough. At present, strong tropical trade winds are pushing ever more warm water westward towards Indonesia, fuelling storms such as November’s Typhoon Haiyan, and nudging up sea levels in the western Pacific; they are now roughly 20 centimetres higher than those in the eastern Pacific. Sooner or later, the trend will inevitably reverse. “You can’t keep piling up warm water in the western Pacific,” Trenberth says. “At some point, the water will get so high that it just sloshes back.” And when that happens, if scientists are on the right track, the missing heat will reappear and temperatures will spike once again.

References-see paper

There's a lot more to the interactions between the atmosphere and the seas and there are some points in this piece that are questionable but it is a good start.

Some of our prior posts:

Apr 2008
Food Riot Watch: Haiti. Just Wait for the Moche Climate*
Apr 22 2008
Climate Change and the Pacific Decadal Oscillation
Apr 2008
Um, folks, um, maybe we should start thinking about rebuilding our grain reserves.
May 6 2008
A Black Swan in Food
Jan 2009
"NASA Explains the Dust Bowl Drought"
Jun 2008
Monthly Pacific Decadal Oscillation Anomalies
Jan 2009
Corn Prices May Enter Decade-Long Slump, Agency Says 
May 2009
AccuWeather cuts 2009 Atlantic hurricane forecast. And: Bill Gray May do the Same
July 2009
El Nino in a Cold PDO – Are they Different?
Dec 2009
Above average hurricane season predicted for 2010
July 13, 2010
"La Niña Update – Week Of July 7, 2010" (Temps. Still Falling)
 July 15 2010
Commodities Surging on Russian Drought Devastation: Harvest Estimates Being Lowered Daily
Aug 9 2010
An Introduction To El Nino/Southern Oscillation, Atlantic Multidecadal Oscillation, and the Pacific Decadal Oscillation – Part 1
Dec 26, 2010
World Crops Threatened by Strengthening La Nina Weather Pattern

Monthly Pacific Decadal Oscillation Anomalies
Your Climateer Early Warning System: Insurance (AIG; ALL; CB; HIG; TRV)
Cold water rings dinner bell for West Coast salmon
Jan 2011
Wheat Up Again as Cold Drought Grip China, La Nina Resumes Downtrend
Feb 2011
Ha! UBS: The Pacific Decadal Oscillation Means Five More Years Of Very Bad Fed Luck

Ocean changes may trigger US megadrought

And many, many more, If interested use the search blog box, keyword PDO.

Here are the latest index values for the PDO and the AMO.

By-the-bye, the AMO went into its warm phase in ca. 1995 and is expectecd to re-enter the cold phase between 2015 and 2020. This will be good news for the property/casualty reinsurance biz.
On the other hand it may lead to crop failures in northwest Russia and Ukraine.