Thursday, July 31, 2014

As a Companion Piece to Bill Gross' "Goodnight Vietnam​" We Have Michael Totten's "Welcome to Vietnam"

We've linked to James Lileks' personal blog, The Bleat, a few times:
Lileks on Money
The Bureau of Corporate Allegory
Scripophily Recapitulates Philately IV
and I end up using pedestrian words such as amazing and incomparable to describe his output.

Today I discover he has a day job (blogging) at the Minneapolis (Minnesota) StarTribune where his Lileks@Lunch for Thursday directs us to:
...TRAVEL TIPS From Michael Totten, freelance globe-trotter:
I was advised to check out Le Mat on the outskirts of the city. There you will find the Snake Village where you can pull up a bar stool and order some snake wine. The bartender will kill a cobra, pour its blood into rice wine, and drop the snake’s still-beating heart into the shot glass.
If you don’t want to drink blood, you can have it with bile instead.
I refused. Why make my stomach churn and possibly heave just so I can write about it? The description of the drink itself is enough. I went to Iraq seven times during the war, but drinking snake wine is over the line. I don’t care whether or not that makes sense.
Where he went, and what he saw, make for a fascinating read. Here you go.
Here is a taste of his Lileks@Lunch:
How to lose 8000 photos
The cloud is not your friend. Do not depend on the cloud. Once upon a time this would’ve sounded like something you would say to friend who has developed a delusional attachment with things in the sky, but now you know what it means. Here’s a piece about how “a bug in Dropbox” accidentally deleted 8000 photos. Well, that would be bad, but those were backed up, right? No? NO? The author wrote to Dropbox: “This is an absolute disaster, I don’t have any other backup of these files, Dropbox was supposed to be the backup.”
If it’s your only copy, it’s not a backup.
YOU THERE The modern style of headline writing isn’t intended to catch your eye but punch you in the nose, because you totally deserve it. The author is better than you because the author is writing for Gawker, and you’re just reading. Basic format: Bald assertion, and preemptive accusation to deflect your objection. Today’s example:
Idiocracy Is a Cruel Movie And You Should Be Ashamed For Liking It
No, and I’m not, and good luck in your future endeavors. As one comment says:
Anyway, the movie has almost nothing to do with genetics and everything to do with culture. It's not about being born with high or low intelligence as much as it is being born into a culture that does not prioritize academics and intellect. This is what Novak gets wrong - in his haste to drum up some social-justice outrage for clicks he totally missed the point of the movie - the point being that intellectual laziness and pandering to base desires and non-contributing hedonism is harmful to society. Maybe he missed the point because he's part of the problem, on that front.
On the last point, no. He’s one of the smarter writers on the site, and constantly produces intelligent, engaging work grounded in a comprehensive grasp of 20th century technological history. Which is why it was dismaying to see his work get Gawkerized thus.
Related, from the Daily Dot: “You're tricking yourself into believing your iPhone is slow.” Didn’t know that about yourself, did you?
SCIENCE !Things like this are always exciting. Then disappointing. NPR:
Astronomers have a mystery on their hands. Two large radio telescopes, on opposite sides of the planet, have detected very brief, very powerful bursts of radio waves.
Right now, astronomers have no idea what's causing these bursts or where they're coming from. And nothing has been ruled out at the moment — not even the kind of outrageous claims you'd expect to see in tabloid headlines.
That’s such an NPR way of putting it. Why not just say “ALIENS”? That’s what we’re all thinking.
BREAKING NEWS Reet-deet-deetle-deetle reet-deet deet-deet:
A clown suffered minor injuries Monday after her clown car crashed into a utility pole in Westwood, New Jersey.
What you want to read next is “the other 25 clowns were unharmed."
The victim, according to The Record, was a 68-year-old female clown whose name was not released. Another clown, who goes by the moniker ‘Poppi T Clown’ told the paper that the accident victim was reaching for her GPS unit when she ran off the road and into the pole. In other words, she may have been juggling one too many things.
The female clown was said to have been driving home from a show at an elementary school. Several of her fellow clowns (“about 10,” the Record said) arrived on the scene quickly to assist her.
Is there a word for a quantity of clowns? A Pennywhistle, perhaps?
Votd Finally, the great lost cartoon show of the 80s has been found and restored! MIKE TYSON MYSTERIES!...MUCH MORE, all in blogger-'95-reverse-chron-order

The Wall Street Journal's Paul Vigna Reviews Sharknado 2: The Second One

Yes, yes we know markets were down the most in months, red for the year etc.
Worry not little cherubs. Rest easy, sleep the sleep of the innocent (at least through Monday's close) and arise with renewed faith in the leverage afforded by calls on the E-mini futures.
From The Wall Street Journal's Speakeasy blog:
The people who brought you the film that revived the careers of Tara Reid, Ian Ziering and the shark from Jaws are back with another mid-summer campfest, and you might think fame and money and notoriety might have ruined all the fun of watching something as idiotically titled as “Sharknado,” but you’d lose that bet, race fans (and really, how did they set this one in New York City and not subtitle it “The Great White Fillet”? That’s a missed opportunity right there.)

Okay, let’s get one thing straight; this is not going to be a Joe Morgenstern, Pulitzer-worthy review. For one thing, Morgenstern wouldn’t stoop to covering this goofball TV movie. For another, well, come on, it’s called Sharknado. How serious can you be about something called Sharknado?

Not very serious, and the people who put this comedy/horror piece of bite-sized zeitgeist don’t take it very seriously, either. They have a lot of fun with it, but the real fun of this is watching it with the second screen. Last summer’s original became a wild, viral hit when people took to Twitter to talk about the movie while watching it. This time around, the producers acknowledged that: a still before every commercial break contained several tweets from viewers. Everybody got in on the act, ever actors. Wil Wheaton, who we were told had a cameo in the movie (we missed it), tweeted this out....MORE

Tesla Earnings Live Blog (TSLA)

Now down 30 cents at $223 even. meh
At MarketWatch:
    • 3:31 pm
    Let’s see – EPS beat, production beat (8,763 Model S during the quarter, up 16% from first quarter)… Why are Tesla shares up just 0.8%?
    Shares have been fluctuating quite a bit recently, said Efraim Levy, an analyst with S&P Capital IQ. “I wouldn’t read too much into it yet.”
    • 3:27 pm
    Shares are edging higher after hours as Tesla reported second-quarter results that beat Wall Street expectations — adjusted EPS was 11 cents, compared with 20 cents a year ago and expectations around 4 cents. Adjusted net income hit $16 million.

Tesla Reports, Market Yawns (TSLA)

After dropping $5.62 (to $223.30) during regular trade, the stock is up $3.45 to $226.75.
From the Company:
Form 8-K
Current Report
Filed Jul 31, 2014

Tesla Motors, Inc. – Second Quarter 2014 Shareholder Letter
•    Tesla and Panasonic announce Gigafactory agreement
•    Site preparation started in June for a potential Gigafactory location
•    Record Q2 Model S deliveries of 7,579 vehicles
•    Record Q2 Model S production of 8,763 vehicles
•    Net income of $16M and $0.11 EPS (non-GAAP), loss of $62M and $(0.50) EPS (GAAP)
•    New Model S/Model X assembly line planned to begin operation next week
•    On track for more than 35,000 deliveries in 2014
July 31, 2014
Dear Fellow Shareholders:
We have had an active first half of 2014, and the rest of the year is expected to be even busier. The development of our large-scale battery manufacturing facility, known as the Tesla Gigafactory, is proceeding well. We have formalized our agreement with Panasonic for cell manufacturing at the Gigafactory and remain on track with the site selection process. In addition, we are adding new production capacity at our Fremont factory that will allow us to meet the growing worldwide demand for our vehicles. The speed at which we are executing this capacity upgrade will allow us to exceed 35,000 Model S deliveries this year. Provided that we execute well and there are no serious macroeconomic shocks, Tesla’s annualized delivery rate should exceed 100,000 units by the end of next year.
Laying the Groundwork for Future Growth
Earlier today, Panasonic and Tesla entered into a formal agreement to partner on the Gigafactory. Panasonic will invest in production equipment that it will use to manufacture and supply Tesla with battery cells. Tesla will prepare and provide the land, buildings and utilities for the Gigafactory, invest in production equipment for battery module and pack production, and be responsible for the overall management of the Gigafactory. Additional Gigafactory partners for production of cell precursor materials will be announced in the coming months to create a fully integrated industrial complex. Processed ore from mines will enter by railcar on one side and finished battery packs will exit on the other.
In June, we broke ground just outside Reno, Nevada on a site that could potentially be the location for the Gigafactory. Consistent with our strategy to identify and break ground on multiple sites, we continue to evaluate other locations in Arizona, California, New Mexico and Texas. The final site for the first Gigafactory will be determined in the next few months, once we have full visibility and agreement on the relevant incentives and processes for enabling the Gigafactory to be fully operational to meet the timing for Model 3. We see these concurrent efforts as prudent. This vehicle will be our third-generation product and will substantially broaden the addressable market for Tesla, helping to accelerate the transition towards sustainable transportation. Any potentially duplicative investments are minor compared to the revenue that could be lost if the launch of Model 3 were affected by any delays at our primary Gigafactory site.
At the Fremont factory, we set a new record for vehicles produced this quarter, which came in tandem with substantial efforts underway to increase the factory’s capacity. Factory production reached 8,763 Model S vehicles during the quarter, up 16% from Q1. Recently, we have been producing about 800 cars per week. Panasonic’s increased cell production capacity in Japan has begun to reduce this critical constraint on vehicle production.

LOGO    To increase manufacturing capacity further, we are building a new final assembly line and adding more automation to our body shop. With advancements in automation and efficiency, our new assembly line has the capacity to produce more than 1,000 vehicles per week and the flexibility to build both Model S and Model X. Production on the new line begins next week after a shutdown for the transition. As planned, the transition will result in about 2,000 fewer units being produced in Q3, while having no significant impact on scheduled customer deliveries. After a short ramp up period in Q3, we foresee average Q4 production of slightly more than 1,000 cars per week, enabling us to meet our 2014 delivery guidance of more than 35,000 vehicles.
Model S/Model X Final Assembly Line – Fremont   
Expanding Model S Demand
At Tesla, we see a clear distinction between demand and deliveries. We measure demand by the number of cars that have been ordered. An order occurs when a customer selects their vehicle configuration and pays the nonrefundable cash deposit. Deliveries, on the other hand, are the fulfillment of those orders. The number of deliveries in a quarter is influenced by three main factors: our ability to increase production; the allocation of that production among our North American, European and Asian markets; and the need to fill the in-transit pipeline for future deliveries in each region. This quarter, for example, we delivered 7,579 Model S vehicles, slightly ahead of guidance and up by more than 17% sequentially. However, even though we increased both production and deliveries, average global delivery wait times increased because our production growth was unable to keep pace with increased demand.
Model S orders, and thus demand, continue to grow even in our most established markets. In both North America and Europe, Q2 Model S orders increased sequentially at a much faster rate than for the rest of the automotive industry. Accordingly, we believe these markets remain under-penetrated. We expect demand to continue to increase worldwide as we continue to grow our customer support infrastructure and broaden the appeal of our products, and as consumer awareness improves.
This year, we are doubling our total global addressable market by entering China and right hand drive (RHD) markets. Model S is off to a very encouraging start in China, especially considering that we are delivering cars only in the areas around Beijing, Shanghai, Shenzhen and recently Hangzhou where we can assure customers of service coverage. We are planning to launch service and deliveries in many additional cities in the upcoming months, including Chengdu and Guangzhou. China has almost 10 times as many cities with more than 1 million people compared to the United States, so we believe the opportunity is substantial.
RHD Model S is also being well received in the United Kingdom where it launched in June and in Hong Kong where it launched last week. Hong Kong is a unique market because Model S is exempt from registration tax that nearly doubles the cost of a comparable luxury car. We plan to begin RHD Model S deliveries in Japan and Australia later this year. Our customers have now driven the Model S for 394 million miles globally, saving nearly 18 million gallons of gasoline.
RHD Model S – United Kingdom


Mutual Funds Already Profiting From Tesla Partner Mobileye's IPO (MBLY)

Following up on Monday's "One Of Tesla's Autonomous Car Partners Is Coming Public (TSLA; MBLY)".
From MoneyBeat:

Mutual Funds Got Head Start On Hot Mobileye IPO 
As investors clamor for shares in Mobileye N.V MBLY 0.00%.’s initial public offering, the auto technology firm has already produced big paper returns for Fidelity Investments, BlackRock Inc.BLK -2.41% and Wellington Management Co. LLP.

Jerusalem-based Mobileye expects its IPO—slated to price Thursday evening—to give it a valuation more than three times what it received in an August 2013 funding round that included the three firms, according to regulatory filings and fund documents.

In roughly the same time frame, the S&P 500 is up 17% and the Russell 2000 index of small companies’ shares has gained 9.7%.

Mobileye, which makes systems that help cars detect other vehicles, pedestrians and roadway markings, and some of its early investors plan to sell 35.6 million shares for $21 to $23 apiece, raising up to $818.5 million before the potential sale of additional shares to underwriters.

In signs of strong demand for the offering, Mobileye raised its price forecast for the shares on Tuesday. Thursday morning, the company filed to increase the number of shares for sale by Mobileye’s early holders, increasing the deal’s overall size by 28%. Fidelity, BlackRock and Wellington aren’t selling any shares in the IPO....MORE

I've Never Seen It Explained So Simply: You Really Can Create Money Out Of Thin Air

The financiers job is the same one faced by the old man in Jack and the Beanstalk:
1) I have to convince you these beans are indeed magic and
2) That the asking price is low enough to appear to be a bargain.
I'll probably approach this task by some combination of bloviation on the merits and insults directed at those too slow to understand.
And a spreadsheet. I'll show you a spreadsheet.

From FT Alphaville:
The curious case of capital gain-like profit
Iren Levina, economics lecturer at Kingston University, brings to our attention a fascinating, if under-appreciated, phenomenon in finance.

She describes this as the “puzzling rise in financial profits and the role of capital gain-like revenues” throughout most of the 2000s, which were totally delinked from real economic growth during the period.
Okay. Why so puzzling you ask? Don’t we know these profits were the result of too much risk taking? And haven’t there been hundreds of papers about this sort of thing?

Well, yes. But this isn’t quite Levina’s argument.

In a paper published in April this year, she argues the reason financial profits became disassociated from real economic growth was because of the way in which they were created and the way they were transferred through the financial system.

More to the point, because they were enabled by the phenomenon of capital-gain like revenues.
In her eyes the monetary assets which facilitated these revenues, meanwhile, have been incorrectly understood by the financial system. They were not, as many believed, borrower liabilities matched by real assets at financial institutions, but rather borrower liabilities matched by something altogether different.

As she explained it to us:
“These assets are neither debt nor equity for these financial institutions, they are liabilities of the ultimate borrowers”
This echoes our own point that the double-entry accounting system is not always well equipped to measure modern-day financial assets.

So what are capital gain-like revenues? At their heart, Levina says, they are monetized expected future gains locked in as current profits, hence the lack of a counterpart in current GDP.

Before we analyse the profound implications of that statement, here’s how financial profits delinked from real economy profits in the period she refers to look like:
So how does the financial system reconcile the discrepancy?

According to Levina, economists have traditionally explained this in two ways....MUCH MORE

"Risk Off As Employment Costs Surge: This Is Where Wages Supposedly Rose The Most"

Following up on our June 25 post "Indicators: Watching Unit Labor Costs Like a Hawk".
From ZeroHedge:
While earlier today initial claims disappointed modestly to the upside, the economic print the market has been fascinated by is the otherwise C-grade economic indicator released by the BLS, the Employment Cost Index, which is quite a backward looking (today's release looked at Q2) at wages, salaries and benefits. The reason it is fascinated by it is that, supposedly, total employment costs rose the most in 6 years, with wages rising the most since Q3 2008 and benefits: the most since Q2 2011. And the reason why the risk switch has been pushed into the Off position is because this alleges that wages are finally rising, something which the Fed did not know yesterday, and which will make the hawkish case that much stronger.
So where did the wages and benefits rise the most? Here is the full breakdown by industry:
And by occupation.

Of course, the paradox is that while BLS is reporting surging labor costs (with a quarter lag), it is also reporting concurrent real hourly wages which continue to decline....MORE

This Ukraine, Gaza, Argentina, Ebola Stuff Is Nothing: 100 Years Ago Today The London And New York Stock Exchanges Closed

The longest circuit breaker.
If one insists on bookending history, this date marks the centenary of London's decline as the world's preeminent financial center.

From Navellier's Gary Alexander at Investors Hub July 27, 2009:
 ...On Thursday, July 30, the rush to sell stocks and buy gold escalated. Panic selling on the New York exchange reached 1.3 million shares, the highest volume since the Panic of 1907. Many blue chip stocks crashed, falling 20% to 30% that single day. GM fell from $59 to $39 (-34%). Even Bethlehem Steel, which figured to profit from making war armaments, was down 14%. That night, exchange officials met to decide whether or not to close the exchange on Friday.

• Early in the morning of Friday, July 31, the London Stock Exchange announced that it would suspend trading until further notice, the first time it had done so in its centuries-long heritage. If the New York Stock Exchange opened for trading on this final day of July, it would have been the only open stock market in the world. Since markets were now connected by undersea cables, all the world’s sellers would converge on Wall Street. In fact, the overnight sell orders “at any price” were lined up for the opening bell, so the NYSE governors decided to close for only the second time in its history. The NYSE was totally closed until the middle of December, 1914, but only a few stocks traded then. The full board only re-opened in April, 1915 – nine months later.

However, U.S. banks stayed open, and the rush to convert cash to gold wiped out many banks. From July 27 to August 7, 1914, $73 million in gold was withdrawn from New York banks alone....
HT: Eddy Elfenbein a few years ago.

London was closed until 4 January 1915, New York until December 12, 1914.
For more on the immediate causes see yesterday's naked capitalism:
The Forgotten Financial Panic of 1914, and the Eternal Recurrence of Short-Term Thinking

Or the Oxford University Press blog:
The unknown financial crisis of 1914
The mounting diplomatic crisis in the last week of July 1914 triggered a major financial crisis in London, the world’s foremost international centre, and around the world. In fact, it was the City’s gravest-ever financial crisis featuring a comprehensive breakdown of its financial markets. But it is virtually unknown. The reason is straightforward: it is simply absent not only from general texts but also from most of the specialist literature.
The financial markets took the assassination of Archduke Franz Ferdinand of Austria in Sarajevo on 28 June in their stride. After all, the diplomatic crises of the previous three summers had been defused. But Austria’s presentation of an ultimatum to Serbia on Thursday 23 July transformed perceptions of the risk of a major European war. This “Minsky moment” triggered a scramble for cash. Continental stock exchanges were deluged with selling orders and banks besieged by depositors. They closed their doors. Governments mobilised for war and imposed drastic controls to safeguard their banking system and national finances.

The week beginning Monday 27 July saw the breakdown of the City’s foreign exchange and discount markets, and culminated in the closure of the London Stock Exchange on Friday 31 July. It stayed shut for five months. Long queues formed at the Bank of England of people changing Bank notes for gold sovereigns. It looked like a run on the Bank was underway. And it was believed that a run on the banks had begun.
 There had been no pre-war planning for such a crisis. Time was bought by the declaration of an unprecedented four-day Bank Holiday. During the break, at 11 pm on Tuesday 4 August, Britain went to war. The initial emergency containment measures were massive infusions of liquidity by the central bank plus a hike in the discount rate from 3 per cent to 10 per cent, following established crisis management doctrine.

Then came novel policy measures: a “general moratorium” on contracted payments (which allowed banks to refuse to pay out deposits), and the introduction of hastily printed small denomination currency notes issued by the Treasury (not the Bank of England). When the banks reopened on Friday 7 August there was no run. The crisis had been contained.... Had worst fears been realised – mass failures among City financial firms and the banks requiring state bail-outs — the crisis might have assumed the magnitude and prominence of a financial catastrophe. But that did not happen in Britain. Hence there was no downfall of a major financial institution or prominent individual depriving the crisis of an iconic victim. The reason was massive and unprecedented state intervention. But that looked like wartime controls rather than financial crisis resolution....MORE

Chart Mania: Everything You Wanted to Know About Current Investor Sentiment:

From The Short Side of Long:
Chart 1: Managers exposure towards equities is now “all-in” mentality!
Merrill Lynch Fund Managers Equity Weighting Source: Short Side of Long
  • This months Merrill Lynch Fund Manager Survey equity exposure came in at 61% overweight, relative to last months reading of 48%. Managers have pushed their exposure towards global equities to second highest levels in surveys history. Last time we saw exposure this extreme was in February 2011, just as the Euro Crisis was starting. As we approach the time of the year usually considered seasonally weak and the Federal Reserve finishes up the taper, equities look rather vulnerable. If you believe in surveys contrarian signals, today is probably not the best time to be buying equities… to say the least!
Chart 2: Bullish sentiment isn’t euphoric, but complacency dominates
Market Sentiment Source: Short Side of Long
  • Summarising various the equity sentiment survey readings for the month, we can observe in the chart above that bullish sentiment has pulled back from last months readings. In general, bullish sentiment hasn’t been all that extreme on either end, but the major story in the recent months has been the lack of volatility and total complacency, which has therefore lead to complete lack of bears. Other sentiment surveys such as Consensus Inc, Market Vane and NAAIM actually show a much higher level of bullishness that usually link to a possibility of a price pullback.
Chart 3: July is shaping up to be 1st major monthly outflow in two years
Equity Fund Flows Source: Short Side of Long
  • This month’s fund flows report by ICI showed global equity funds showed a first estimated monthly outflows of -$9.4 billion, after so many consecutive monthly inflows. The chart above contains red dots, which show time periods in the last seven year history where retail investors pulled money out of mutual funds for the first time, after several monthly consecutive inflows. First occasion was in early 2007, just as the market was near its peak. Second occasion was into late 2009, just after a powerful rebound. Markets stalled over the coming months. Third occasion was into middle of 2011 just as the market was near its peak. And finally, here we are today…
Chart 4: Skew Index has remained above 135 for the last several weeks!
Skew Index Source: Stock Charts (edited by Short Side of Long)
  • Summarising this month’s options & volatility conditions continue to remain in a very complacent zone. Obviously, this isn’t a major worry for the time being, until volatility starts picking up and investors start getting worried. A market trader with a keen eye should have already noticed a pick up in the VIX, as it diverges with large cap indices such as S&P 500. Furthermore, while not perfect, another indicator is also flashing warning signals. Skew Index, seen in the chart above, is used to predict a possible pick up in volatility. The 10 day moving average of the indicator has remained above 135 for several weeks now, which according to CBOE indicates almost 12% chance of a 2 standard deviation move.

HT: Abnormal Returns

Wednesday, July 30, 2014

PIMCO's Bill Gross: "Goodnight Vietnam​"

It was a matter of happenstance I suppose – certainly not serendipity. Our meeting may have been an inevitable coming together, but it was certainly not initially welcomed by me. Happenstance is the better word. Fateful happenstance.
Serendipity rarely happens in a cab and it was in a San Francisco cab – not an Uber – where I confronted my ancient past. Sue and I were headed back to the Four Seasons after a brief glimpse of the city at dusk from the “Top of the Mark.” The driver appeared to be Vietnamese, and having had a margarita or two, I unfortunately stumbled into the emotional jungles of Vietnam to which I had come, and from which I had safely departed nearly a half century ago. “You’re Vietnamese,” I said, “how old are you?” “53,” he said. “I grew up in Da Nang and escaped when I was 8 with my mother, after my father and older brother were killed.” I subtracted 8 from 53 and quickly placed him in Vietnam at the same time I had been, in 1969.

“Have you ever been there?” he queried. “Well yes,” I stuttered, “about the time you left, but I was in the Navy” – an excuse that supposedly cleared me of direct involvement, but in reality was not the case. An awkward silence followed. I wanted to say, “I’m sorry for what we did. I/we shouldn’t have been there.” I desperately wanted to say that. But I didn’t. I missed my moment of atonement and we continued on to the hotel. Getting out I gave him a $20 bill for an $8 fare – a weak apology to be sure, and he knew it. “No,” he said, “that is too much, take back 5 dollars.” I did – apology accepted – flawed as it was. He and his mother had survived and moved on. Perhaps I have too. “Goodnight,” I said. Goodnight Vietnam ....

Don’t say “goodnight,” but say “good evening” to the prospect of future capital gains in asset markets. Investors won’t be getting much of them. Financial markets have had nearly a half century of peaceful (sometimes volatile) asset appreciation fueled particularly by the decline in real and nominal interest rates from 1981 onward. We know that bond prices go up when interest rates go down, but somehow have to be reminded of a similar effect on stocks, real estate and commodities. Almost all commonsensical and historical financial models tell us interest rates are a key asset price driver. But now – and since 2012 – we have reached the beginning of the end just as I did in 1969 – the dusk of asset appreciation – because it has lost its primary interest rate driver. And after nearly 5 years of U.S. near-zero percent policy rates and global quantitative easing, which have seen the Fed’s balance sheet – to name one – expand by nearly 4 trillion dollars, and those of the BOJ and the BOE increase proportionately more, the global economy is left to depend on economic growth for further advances, and it is growth that is now and has recently been historically deficient.

At PIMCO, Paul McCulley recently reminded us that structural global growth rates have come down due to a yawning gap of aggregate demand relative to aggregate supply. Economist speak, I suppose (and he’s a good one), for not enough willing or able consumers: 1) they have too much debt, 2) Boomers are getting older, 3) workers are outdated and outjobbed by technology, and 4) labor is overwhelmed by corporations with the power to contain wages at a lower rate than topline increases. Demand is deficient because consumers are experiencing their own Vietnam from a multitude of directions....

HT: DealBreaker 
Also via DealBreaker:
Man wearing plastic bags robs Kingman store  

A Big ($1.1 Billion) Hedge Bet In Financial Stocks (XLF)

From Barron's The Striking Price column:

Is Financial Sector on Verge of Tumbling?
A deep-pocketed investor has placed a $1.1 billion hedge with FLEX options that will pay off if financials fall 10%. 
A major investor with deep pockets thinks the financial sector could tumble 10%.
Over the past several days, he amassed a large financial sector hedge. He tried avoiding attention by trading within an obscure part of the options market. But the trading volume was so large that it appeared on screens widely used on Wall Street to monitor trading volume. 

With the Select Sector SPDR-Financial exchange traded fund (ticker: XLF), a proxy for financial stocks, trading around $22.90, the investor bought 561,000 Select Sector SPDR-Financial January $20.63 puts that expire Jan. 14. These Flexible Exchange, or FLEX options, expire three days before the standard January expiration cycle.

FLEX options are bespoke options contracts that let investors select the expiration and strike price. Those terms are standardized in the listed options market. Sometimes, investors change contract specifications to more closely align options contracts with anticipated events or the price of their securities. This type of trading usually occurs in the private over-the-counter market that banks operate for their best clients. 

On Friday, the investor bought 150,000 puts. On Monday, the position was increased by 350,000 contracts. On Tuesday, another 61,000 contracts traded.

In total, the hedge represents about $1.1 billion in value of the underlying ETF, according to Henry Schwartz of Trade Alert, an options-volume analysis firm. The investor paid 35 cents for each contract....MORE

Alt Assets: "US timberland prices gain, despite lumber slowdown" (PCL; WY; RYN; CTT; PCH)

From Agrimoney:
Timberland in the US accelerated its price growth, despite some lumber market concerns centred on China and the domestic market, which prompted one of the top forestry groups to warn on profits.

US timberland prices were 7.2% higher in the April-to-June quarter than a year before, nudging 0.2 points higher than the rate of annual appreciation recorded for the January-to-March period, the National Council for Real Estate Investment Fiduciaries (Ncreif) said.

Factoring in income of 2.6%, the total return from forestry land over the year was 9.9%, the highest figure in nearly six years, although still behind the 17.2% achieved from farmland.

The performance "reflects a combination of strong export demand from China for logs and lumber and a healthy domestic demand in the US for timber products", said Mary Ellen Aronow, chair of the Ncreif timberland committee.

'Some hurdles'
However, Ms Aronow, a senior forest economist at Hancock Timber Resource Group, acknowledged some challenges to these factors, saying noting "some hurdles still facing the recovering US housing market, and a cloudy outlook for Chinese demand".

Earlier this week, Plum Creek Timber, which controls 6.7m acres of US forestry, cut its forecast for full-year earnings to $1.05-1.25 a share, from $1.30-1.50 a share, citing a market recovery in 2014 which "has been more muted than we and other industry participants initially expected"....MORE

The other publicly traded names are Weyerhaeuser, Rayonier, CatchMark and Potlatch.

99% Of Hedge Funds Interviewed By Prequin Expect Returns Of Less Than 11% In 2014

I had to clean up the headline a bit.
From ValueWalk:

99% Of Hedge Funds Expect Returns Of Less Than 11% In 2014 
These stats are pretty shocking considering the S&P 500 is up over 7% already in 2014 – see more details below
Preqin interviewed 150 fund managers and 100 institutional investors in June 2014 to ascertain their outlook on the hedge fund industry as we entered the second half of the year. When asked to predict the end of year benchmark value in 2014, 99% of hedge fund managers predicted the All Hedge Funds benchmark would be 11% or less, below the 11.69% hedge funds returned in 2013.
Hedge Fund Performance

Hedge Fund Performance: Other Key Findings

  • 53% of fund managers and 51% of hedge fund investors believe the 2014 benchmark will fall between 4-6%.
  • As of June 30th 2014, the Preqin All Hedge Fund benchmark has posted net returns of 3.68%.
  • The bulk of this performance was added in Q2 2014, with the benchmark making gains of 2.33% in the second quarter of the year, versus net returns of 1.32% in Q1.
  • Investors are more positive on the outlook for the benchmark than fund managers; 10% of investors believe the industry will make gains of 10% or more in 2014, versus 7% of fund managers....MUCH MORE

Climateer Line of the Day: Sic Transit Gloria Money Edition

You have to visit FT Alphaville's "This is nuts. When’s the crash?" post. I can't extract the line, involving bags of cash, without losing the meaning, roughly translated as "WTF, it's worth how much?"

Oil: Goldman's Hatzius On Shale's Macro Impact: Meh

From AEI Ideas:

Sorry, the shale revolution won’t save the US economy
Even with an unexpectedly strong second-quarter GDP report, the current economic recovery is the weakest since World War II. Even worse, many long-term forecasts — including those from the Congressional Budget Office, Federal Reserve, and White House — see future growth far slower than the postwar average. But the economy would be even weaker, and those forecasts gloomier, if not for the shale revolution. Here is Goldman Sachs economist Jan Hatzius:
  … we estimate that the overall impact from the increase in US energy supply on real GDP growth is currently in the range of 0.2-0.3pp per year. Most of this is due to the direct effects from increased energy output and drilling activity, while the spillovers to other industries or via lower household energy bills have been more modest.
So, lots of energy industry investment and output. But a sector story rather than a macro story.
1.) Hatzius goes on to note that lower energy prices have not given a significant boost to energy-intensive industries: ” … output in the most energy-intensive manufacturing industries has in fact grown more slowly than in less energy-intensive ones.”

2.) Nor have US energy intensive industries outperformed energy-intensive industries in other countries. And Goldman hasn’t been able to find much evidence for a significant increase in capital spending in energy-intensive industries” other than chemical manufacturing....MORE

New York Times Considers Tiny Print Edition For Lower Price

"Some of the news that's fit to print"

They'd better do something or the Sulzberger clan runs out of money and power.
From Capital New York:
Shorter Times?
The New York Times is considering the introduction of a truncated version of its daily print edition at a discounted rate as the paper mulls new strategies for maximizing the number of people who pay to read its content.

The potential offering "would be significantly shorter than the current edition and offer a selection of the day's best content for roughly half the price," according to a recent reader survey that was shared with Capital. As with a standard print subscription, it would also come with unlimited digital access, the survey said. Daily delivery of the full print edition costs $23.60 to $67.60 every four weeks depending on location and frequency.

A shorter print option would dovetail with new digital apps the Times has been rolling out to cater to readers who aren't necessarily willing to pay for's full buffet of content, to which unlimited digital access begins at $15 a month.

Those apps, such as NYT Now, which offers a curated stream of Times stories for $8 a month, aren't off to the most impressive start in terms of sign-ups. During the second quarter of 2014, the Times logged 32,000 new subscriptions across all of its digital offerings combined, putting the total number of people paying to read the Times on web browsers and mobile devices at around 831,000....MORE

10-Year Yield Declines as QE Winds Down

2.4690% last, off 0.0220.
GaveKal via Advisor Perspectives:

Treasury Bond Yields Still Catching Bid in Line with Slowing QE
Last week we wrote that the bond market is following perfectly the reduction of QE with new 1-year lows and with today's bond moves that trend is still firmly in place. In what may seem counter intuitive, treasury bond yields have had a high positive correlation with the rate of Federal Reserve asset purchases. When the rate of Fed asset purchases rises, bond yields rise, and vice versa. If one thinks of Fed asset purchases as stimulative to growth and inflation expectations (the two components that make up risk-free bond yields) then this positive relationship makes sense.

In the charts below we measure the rate of Fed asset accumulation by measuring the three month difference in the size of the Fed's balance sheet. Since the Fed has scripted out the end of QE, we can easily model out how this rate of change will proceed for the remainder of the year. We then compare the rate of change in Fed assets to the 30-year bond (1st chart), the 10-year bond (2nd chart), and junk spreads inverted (3rd chart). The link between Fed asset accumulation and these various bond yields is unmistakable, especially for longer duration bonds, and this simple model shows how even lower bond yields may be in the offing as the Fed puts on the breaks. For junk bonds, this seems to portend higher spreads, which may help to put the recent widening of spreads in context. 




Forecast For New York City

Risk: Earthquakes Near New York City

At the Federal Emergency Management Administration's website this is the message you receive when accessing the page
Page Missing
Oops. This isn’t good, you’re getting an error message. If you bookmarked a page, it’s possible the page moved or was removed.
Please try searching for the page you're looking for.

Error Code: AK7894
No kidding 'this isn't good'.
Here's Columbia University's Lamont-Doherty Earth Observatory:


Richter (ML)
Max. Intensity
1884 Aug 1019:0740.4573.90Greater N.Y. City area5.2VIIThrew down chimneys - felt from Virginia to Maine;
1737 Dec 1903:4540.8074.00Greater N.Y. City area*5.2VIIThrew down chimneys  
1783 Nov 3003:5041.0074.00N. Central N.J.*4.9VIThrew down chimneys  
1847Greater N.Y. City area*4.5VProbably Offshore  
1848 Sep 0941.1173.85Greater N.Y. City area*4.4VMany people in the NY City area felt the earthquake
1895 Sep 0111:0940.5574.30N. Central N.J.4.3VILocation determined by fire and aftershock
1985 Oct 1910:0740.9873.83Ardsley, N.Y.4.0IVMany people in the NY City area felt this earthquake  
1927 Jun 0112:2340.3074.00Near Asbury Park, N.J.3.9VI-VIIVery high intensity in Asbury Park, NJ - perhaps shallow event
1845 Oct 2623:1541.2273.67Greater N.Y. City area*3.8VI
1938 Aug 2305:04:5340.1074.50Central N.J.3.8VI
1951 Sep 0321:26:2441.2574.00Rockland Co., N.Y.3.6V
1937 Jul 1903:5140.6073.76Western Long Is., N.Y.3.5IVOne or few earthquakes beneath Long Island
1957 Mar 2319:0240.6074.80Central N.J.3.5VI
1874 Dec 1103:2541.0573.85Near Nyack and Tarry-town, N.Y.3.4VI
1885 Jan 0411:0641.1573.85Hudson Valley3.4VI
1979 Mar 1004:49:3940.7274.50Central N.J.3.2V-VIFelt by some people in Manhattan[it is called Chesequake earthquake]
2001 Oct 2701:42:2140.7973.97Manhattan, New York City2.6IVFelt in Upper West Side of Manhattan, Astoria and Queens, NYC
2001 Jan 1712:34:2240.7873.95Manhattan, New York City2.4IVFelt in Upper East Side of Manhattan, Long Island City and Queens, NYC
* Location very poorly determined; may be uncertain by 50 miles.
ML = Richter local magnitude

Topographic Map and the Largest Earthquakes Near New York City.

Return to Data Home

Positivity Not All It's Cracked Up to be

One of the good guys, Alan Sokal wrote the classic"Transgressing the Boundaries: Towards a Transformative Hermeneutics of Quantum Gravity". 
From Retraction Watch:

“Positivity ratio” research now subject to an expression of concern
An expression of concern has been issued for the second of three papers on the idea that, if you have three positive emotions for every negative one, you will be more successful in life.

Psychologist Barbara Fredrickson, of the University of North Carolina, Chapel Hill, has spent the last decade building a brand around this ratio, initially described by a mathematical equation based on fluid dynamics by mathematician Marcial Losada. You can read our coverage of the debunking of that equation, presented in a 1999 paper that has been cited nearly 1,700 times, here.

Nick Brown, co-author with Alan Sokal on the paper that discredited the Losada equation, has written a blog post on the current state of affairs. He also got in touch with us regarding the expression of concern for a 2004 article in American Behavioral Scientist that he had also questioned, “The Role of Positivity and Connectivity in the Performance of Business Teams: A Nonlinear Dynamic Model”:

The Editorial Board and Publisher of the American Behavioral Scientist hereby issue an Expression of Concern regarding the nonlinear dynamic model and sebsequent model-based predictions in the article entitled “The Role of Positivity and Connectivity in the Performance of Business Teams: A Nonlinear Dynamic Model” published in the February 2004 issue of the American Behavioral Scientist.
The non-linear dynamic model employed was first introduced in Losada (1999), expanded upon here and in Fredrickson & Losada (2005).

This set of three papers was critically examined in a 2013 American Psychologist article (Brown, Sokal & Freidman, 2013). Fredrickson and Losada (2005) was subsequently corrected by Fredrickson (with Losada’s assent). Specifically, the non-linear dynamic modeling element of the 2005 article was withdrawn as invalid and, along with it, the model-based predictions about the particular positivity ratios of 2.9 and 11.6. Other elements of the 2005 paper were upheld as valid, including the empirical evidence that linked higher positivity ratios to flourishing mental health (Fredrickson, 2013)....MORE
Here's Wikipedia on what came to be called The Sokal Affair.

LME warehousing; all change or no change?

From Reuters India:
On the surface at least, much has changed in the London Metal Exchange (LME) warehousing business over the past year.

But take a deeper look, and it is clear that the underlying structural problems are still there. The exchange has much more work to do if it wants to rectify a delivery system that has ruptured relations with some of its users and generated a spate of lawsuits in the United States.

What the LME has done is add three new delivery locations, extending its global warehousing network to Kaohsiung in Taiwan, Moerdijk in the Netherlands and, for copper only, Panama City in the United States.
Several new operators such as Whelan Metals, BTG Pactual and Independent Commodities Logistics have joined the ranks of registered warehousers, while other smaller companies such as Erus Metals and Scale Distribution have expanded their foot-print.

The exchange will also take some satisfaction from the reduction in the number of delivery queues even though its proposed rule change linking load-in to load-out rates is itself log-jammed in the UK legal system.
Not yet revealed are the results of logistics and legal reviews of the LME's warehousing system, commissioned by the exchange. Either of them could yet prove as significant as the LME's current assault on the queue model, which had been exploited so efficiently by Metro at Detroit and Pacorini at the Dutch port of Vlissingen.

Even after this series of changes, however, the exchange's physical delivery function is still dominated by a handful of players and, more problematically, by operators tied to some of the world's most powerful trading houses.

The total number of LME-registered storage units, excluding those holding steel, contracted marginally over the last 12 months to 666 from 678, primarily due to cuts by those companies most associated with load-out queues.

In the case of Impala Terminals, previously known as NEMS before being rebranded by its owner Trafigura, the attempt to build a queue at Antwerp never really got off the ground.

A rapid build-out in capacity has gone into reverse, with the number of Impala sheds at Antwerp falling to 12 from 26 last July as it scales back its LME ambitions.

Metro, currently owned by Goldman Sachs but with a "for sale" sign on it, reduced its footprint by 12 units over the last year, extending a retreat that began two years ago.

It is trimming its presence just about everywhere apart from its core LME operations in Detroit, where it still runs 27 sheds with 1.41 million tonnes of metal in them as of the end of June.

Even Pacorini, owned by Glencore, has tempered its previous capacity surge, reducing the number of storage units in Vlissingen by 12 to 41....MORE

Tuesday, July 29, 2014

"Has the Stock Market Really Lost Its Mind?"

From Barron's Read This, Spike That:

A couple of articles debunk the notion that stocks have gotten ahead of rational thought. 
There is a group of investors who believe that the stock market's current valuation reflects some irrational exuberance. 

How else, the thinking goes, can one explain why the broader stock indexes have held onto gains in recent months even with building geopolitical tensions in the Ukraine and in the Mideast. Such investors also look at the famous cyclical-based valuation metric of their patron saint, Yale economist Robert Shiller, as evidence that stocks are ahead of where a rational market would place them. 

But how often has the investment crowd really lost its collective wisdom? A couple of articles suggest that market valuations are quite reasonable. 

As for rising geopolitical tensions, an article in the Financial Times cites JPMorgan Asset Management data indicating that the world's military skirmishes really don't matter that much to global equity markets -- at least for now. And a thoughtful piece by Reuters columnist Anatole Kaletsky pokes some holes in Shiller's widely-discussed valuation measure. 

The Financial Times article makes a very simple point: that places like the Ukraine, Iraq, Israel and the Gaza – the so-called "war-zone countries" – really don't amount to much when looking at measures such as overall equity-market value, foreign direct investment, and global economic output, among other criteria....MORE

Bored Elon Musk: Tesla Chairman WILL Appear on the Simpsons (TSLA; SCTY)

Following up on "Bored Elon Musk On Almonds".
From Jalopnik:
Elon Musk Will Bankrupt Mr. Burns On The Simpsons
...The episode, titled The Musk Who Fell To Earth, reportedly has Mr. Burns losing all of his cash to Elon, leaving Burns bankrupt and on the street. Considering the Springfield billionaire's love of all things nuclear, it's safe to assume that Musk's push for sustainable power will play heavily in the plot line. And a Simpson-ized Model S should look better than the Elec-Taurus from Beyond Blunderdome in season 11, which starred... Mel Gibson....MORE
​Elon Musk Will Bankrupt Mr. Burns On The Simpsons

San Francisco Real Estate As A Leading Indicator Of the World Economy

S.F. and the Valley are dependent on the world shoveling a lot of money Bay-way.
Lifted in toto from ZeroHedge:

What San Francisco Housing Reveals About The Fourth Global Liquidity Bubble
A month ago, when we reported on the signal America's "most important housing market" is sending we said the following:
When it comes to critical housing markets in the US, none is more important than San Francisco.

Courtesy of its location, not only does it reflect the general Fed-driven liquidity bubble which is the tide rising all housing boats across the US, but due to its proximity to both Silicon Valley and China, it also benefits from two other liquidity bubbles: that of tech, and of course, the Chinese $25 trillion financial debt monster, where since the local housing bubble has burst, local oligarchs have no choice but to dump their cash abroad.

It is no surprise that during ever single previous bubble peak, San Francisco home prices managed to post a 20% annual increase, starting with the dot com bubble in the year 2000, the first (not to be confused with the current) housing bubble peaking around 2005, and then the European sovereign debt bubble.

Which is why, while today's Case Shiller data was widely disappointing across the board, indicating a significant slowdown in price gains (and on a sequential seasonally adjusted basis, practically a decline), the one market we paid particular attention to was San Francisco. What we found is a red flag for everyone waiting to time the bursting of the latest housing bubble. Because after an unlucky 13 months of posting consecutive 20% Y/Y price gains, the San Francisco bubble appears to have finally burst, posting "just" an 18.2% price increase, the lowest since January of 2013.

So, has the global coordinated credit bubble burst?
The answer is still unclear. But what the chart below shows is quite clear: the relentless appreciation in the San Francisco housing market is over, and after rising by 18.2% in April, in May the San Fran market posted a mere 15.4% Y/Y price increase: the lowest since 2012. And while the Fed's liquidity injections continue, if only for a few more months, and the second dot com bubble is clearing raging as the recent ridiculous Zillow-Trulia deal confirmed, it appears that the "?" bubble (as defined) is now well in its deflationary phase. Any attempts to restore the upmove will certainly require trillions more in fresh liquidity.

Wilbur Ross: Big Upsurge in Russians Going to Cyprus

From ValueWalk:
Billionaire investor Wilbur Ross spoke with FOX Business Network’s (FBN) Maria Bartiromo during Opening Bell with Maria Bartiromo about investing in the Bank of Cyprus. Ross said, “Cyprus, we think is going to be the next one to really turn around” and that  “there has been a very big upsurge in Russian tourism to Cyprus.” When asked about whether he thinks Europe has recovered financially Ross said, “I think it is a selective recovery” and that “we’ve been buying a lot in Europe.”
wilbur ross Puerto Rico
Excerpts from the interview are below.

Wilbur Ross on investing in the Bank of Cyprus given the conflict between Russia and Ukraine:
“Well actually there has been a very big upsurge in Russian tourism to Cyprus because people are concerned with what’s going on there and it’s a very good place to go. A lot of the restaurants have waiters who speak Russian – menus in Russian, things of that sort, so a lot of middle class Russians and Ukrainians vacation in Cyprus.”

Wilbur Ross on whether he would be interested in selling the Russian piece of the Bank of Cyprus:
Well it’s early days, so we have to figure out what to do, but clearly when they are in the middle of the war it’s not the right time.”...MORE

Bored Elon Musk On Almonds

From Bored (ahead of earnings) Elon Musk:

Scientists: Rich People, Poor People May Have Shared Common Ancestor

From America's Finest News Source:
According to a study released this week by geneticists at Cornell University, substantial evidence indicates that rich people and poor people—disparate populations long thought to be entirely unrelated—may have once shared a single common ancestor. “After conducting careful DNA analysis, our research team was taken aback to discover that the wealthy and the working class actually have a considerable number of genetic similarities,” said study co-author Kenneth Chang, adding that despite the disparity between the modern-day affluent and low earners in terms of behavior, appearance, and lifestyle, numerous genetic markers revealed that their predecessors may have once lived beside one another without any noticeable differences. “Side by side, poor people and rich people look almost nothing alike, of course....MORE
Funny despite the fact L'Oignon missed a trick. The co-author should have been K. Ching,
not Chang.

Asher Edelman-Art World's Gordon Gekko-Get's Into the Art Leasing Biz With Heavyweight NYC Landlord, Durst Organization

"Art world's Gordon Gekko" is from an old Wall Street Journal headline.
From the NYT's DealBook:

A Landlord Rents Office Space, and Maybe a Picture or Two

A new venture will offer commercial customers the ability to lease works by well-known artists like Andy Warhol (though probably not these, which were sold in May at Sotheby’s).Credit Sotheby’s

Many business owners want their offices to reflect good taste, with fine art on the walls. But they must weigh the cost against the vagaries of the marketplace. A few good years, and the millions come rolling in. A few setbacks, and the banks send a crew to pack up the furniture.

For this cold reality comes a new service: art leasing. A business being started by the Durst Organization, the big Manhattan office landlord, and Asher Edelman, a New York art financier, plans to acquire fine art and allow banks, hedge funds and other businesses to lease it for their office walls, a cheaper alternative to buying. 

Mr. Edelman said in an interview that the service would offer customers the ability to lease works by well-known artists like Andy Warhol and Frank Stella under leases of five years or longer for annual fees he estimated might be 6 percent to 12 percent of the artworks’ market value. Some of the leases may also include an option to purchase.

While a few such services already exist, the entry into the market of a landlord that owns 13 million square feet of prime office space and a well-known if controversial art connoisseur appears to reflect the current boom in art-market prices and prestige.

“Conceptually, there’s a legitimate need for it,” said Jeff Rabin, co-founder of Artvest Partners, an art and finance advisory firm in New York City. But he noted that its merits would depend on the terms and structure of the leases. 

“A lot of tenants are interested in fine art but may not have the time or money to get involved to acquire the art or to finance the art,” said David Neil, chief administrative officer of the leasing and marketing division of the Durst Organization. “We believe this venture will be a tremendous amenity and benefit for tenants not only in our buildings but elsewhere.”

A Wall Street raider in the 1980s, Mr. Edelman, 74, said the leasing business would be called Artemus, which he described as a male variation on Artemis, the Greek goddess of the hunt. Another partner in the venture is David Storper, a distressed-investing expert who worked for 16 years with Wilbur Ross, leaving W.L. Ross & Company in 2012. 

Mr. Neil said Mr. Edelman proposed the art-leasing venture after Durst’s chairman, Douglas Durst, visited his East Side gallery, Edelman Arts, about a year ago. Mr. Edelman has since advised Mr. Durst on art for one of his office buildings. His main business, ArtAssure Ltd., offers art-related loans, sale guarantees and the purchase of large collections....MORE
HT: Art Market Monitor