Wednesday, July 1, 2015

Oil Falls as Inventories Rise

NYMEX WTI traded down to $57.73, currently $57.99, off  $1.48.
From the Wall Street Journal:

Oil Declines on U.S. Inventory Data
Futures fell as weekly data showed the first increase in crude-oil supplies in nine weeks
 Oil prices extended their losses on Wednesday after weekly inventory data showed the first increase in U.S. crude-oil supplies in nine weeks.

Light, sweet crude for August delivery recently fell $1.55, or 2.6%, to $57.92 a barrel on the New York Mercantile Exchange. Brent, the global benchmark, fell $1.04 cents, or 1.6%, to $62.55 a barrel on ICE Futures Europe.

Commercial crude-oil inventories in the U.S. rose by 2.4 million barrels in the week ended June 26, the U.S. Energy Information Administration said Wednesday. Analysts surveyed by The Wall Street Journal had expected a decline of 1.2 million barrels.

U.S. oil supplies have shrunk in recent weeks since hitting a record high in April, as refineries have processed more crude into gasoline and other fuels. The inventory drops have helped boost U.S. oil prices by 25% in the second quarter.

But last week, stockpiles rose even as refinery utilization increased from 94% to 95% of capacity, the EIA said.

“Even at these high utilization rates, we are not drawing enough inventory,” said Andy Lipow, president of Lipow Oil Associates in New York. “This portends continued crude-oil price weakness through the balance of the year,” especially in the fall when refineries shut units to perform seasonal maintenance, he said. ...MORE
Here are the last couple weeks of trading via FinViz:

Largest U.S. Public Employee Pension Fund, CalPERS. To Fall Short Of Assumed Returns Once Again

This is not the same as oops, "missing your target".
The return assumptions are part of the actuarial funding matrix required to keep the pension fund solvent. We've been calling CalPERS out for faulty assumptions since 2007, and are starting to think maybe they aren't very good at what they do.

Here's a post from July 2012:
FAIL: CalPERS Posts 1% Return for Fiscal Year Ended June 30, 2012.
CalPERS is the largest pension fund in the United States with assets of $233 Billion.
California taxpayers are on the hook for any shortfall in investment gains vs. the benchmark.

We have dozens of posts on the behemoth, does anyone else remember this from Patricia K. Macht, Assistant Executive Officer, Office of Public Affairs in March '09

Read more here: http://blogs.sacbee.com/the_state_worker/2009/03/calpers-other-pensions-oversta.html#storylink=cpy
Beware of the anti-pension ideologues who come out of the woodwork during market downturns. Like vultures, they prey on the highly charged and negative investment environment, looking for ways to convince you a temporary performance downturn will be typical for all time!

They know -- but don't tell you so -- that we set our rates based on a fiscal year investment return. They don't tell you that our assumed rate of return is made based on advice from a range of experts within CalPERS and within the industry and that it is regularly evaluated every two to three years in public session. They don't tell you what you would learn from a textbook on pension management: that some years investment returns are as expected; other years, they will be more than expected and yes, some years they will be less than expected...
They put that out when the fund assumed a 7.75% annual return.
They only this year were shamed into lowering it to 7.5%.

Following up on January's "CalPERS Earns 1.1% in Calendar 2011, a Bit Less Than the 7.75% They Need"....
As that post, and others, goes on to say, the embedded assumptions in the 1999 pension law, SB 400, are 25,000 on the Dow Jones Industrial Average by 2009 and 28,000,000 by 2099.

And the latest, from the Los Angeles Times:
CalPERS likely to fall short of annual investment goals
The nation's biggest public pension fund is falling far short of its annual investment goals, a setback for a system already straining to keep up with looming obligations.

The California Public Employees' Retirement System earned only 3% in the 10 months that ended April 30 and is likely to fall short of its 7.5% annual target when the fiscal year ends Tuesday, the pension giant's investment chief said.

Absent a "remarkable rally in the global stock market," said Ted Eliopoulos, CalPERS' chief investment officer, the ground to make up in two months is too great to avoid a likely shortfall.

"We don't like to get too excited about any one-year return," he said. "As the board is well aware, we would like to look at longer time periods as they are much more meaningful in measuring our performance."
Eliopoulos' remarks came in a prepared statement to the CalPERS board last week. A video of the public meeting was posted on YouTube, but not yet on CalPERS' website. CalPERS posted monthly financial data Thursday.

The performance of CalPERS, with investments totaling $304.9 billion at the end of April, is closely watched in the financial world and has broad implications for California taxpayers.

Charged with paying benefits to 1.7 million current and future retirees, CalPERS has the power to compel government employers to make up any shortfall in its fund. The pension plan was only 77% funded at the end of last June....MORE
We have so many posts on CalPERS (and the slightly smaller CalSTRS) that it is easiest, if interested, just to do a Google search rather than list individual posts which run into the hundreds:
site:climateerinvest.blogspot.com calpers 

Major Asset Classes | June 2015 | Performance Review

From the Capital Spectator:
The markets staggered to the year’s midpoint with a thud, with most of the major asset classes suffering losses in June. The exception: broadly defined commodities (Bloomberg Commodity Index), which posted a modest 1.7% gain last month. The rest of the field was either flat or (in most cases) in the red. The big loser: US real estate investment trusts (REITs), which shed a hefty 4.6% in June....MORE
http://www.capitalspectator.com/wp-content/uploads/2015/07/gmi.01jul2015.png

Despite the uptick in commods see also last week's "Commodity Producers Still Struggling (CRBQ)".

Britons can't stand the heat when it goes above 28 degrees (82.4°F)

From CityA.M.:

Seriously, it's hotter than the Sun right now (Source: Getty)
Today's heatwave will push temperatures several degrees above what Britons consider acceptably warm.
Today is expected to be the hottest day of the year, with the Met Office forecasting temperatures as high as 35 degrees in some parts of the country. 
Despite spending the vast majority of the year complaining about the cold, it seems we're not that keen on the heat either. 
A YouGov study found that the optimum temperature for the average Briton is in fact 21 degrees. [69.8°F]
By the time it gets to 28 degrees, we've decided it's too hot. 
We're definitely more comfortable further down the thermometre. On average we consider six degrees to be too cold – although Scots can take it down two more notches to four degrees. Londoners have a lower tolerance, however: their cold cut-off point is seven degrees. ...MORE
Which may explain why Paul Murphy, honchō of FT Alphaville and Godfather of today's main event posted: What to wear at Camp Alphaville yesterday.

Tuesday, June 30, 2015

"PM Markets: Corn Futures Climb 7% as US Data Rocks Markets"

Corn          422-0s    +30-0
Soybeans  1037-2s    +57-2
Wheat        615-6s    +32-2

From AgriMoney:
Corn futures ended up more than 7% on Tuesday, as grains soared on data from the US Department of Agriculture which showed stocks and acreages sowed behind analyst's expectations.
Grains are making 2015 highs, as the markets adjust to a double whammy of lower than expected sowings, and surprisingly thin stocks.

Soybeans saw the biggest surprise in the USDA numbers.
US stocks of soybeans as of June 1 were seen at 625m bushels, compared to trade expectations of 670m bushels.
'Another big surge'
Soybeans acreage estimates, based on early June surveys, were seen at 85.139m acres, compared with analyst's expectations of 85.171m acres, though still exceeding 2014 plantings of 83.701m acres.
The latest planting data may not even show the full extent of the decline in soybean acreage, as it will not reflect the most recent changes in farmer intentions as a result of the heavy Midwest rains, which could have caused farmers to take out prevented planting insurance, leaving the ground unsown....MORE

"Bill Gross Warns About Liquidity In Next Crisis"

I think various journalists have been talking liquidity longer than M. Gross, reminding yours truly of the Revolution of 1848, Alexandre Auguste Ledru-Rollin, and the quote attributed to him:
"Il faut bien que je les suive, puisque je suis leur chef".*
Phrase historique prononcée à Paris - 1848EVEN.fr

From MarketBeat:
The markets have not been put under stress in years, Janus Capital 'sJNS +2.97% Bill Gross noted in his latest investment letter, and if and when that day comes, the  outcome may look very different from the last crisis.

The reason: thanks to legislation and lawsuits, regulators and central bankers may have fewer options in the next crisis than they did in the last.

“Investors and markets have not been tested during a stretch of time when prices go down and policy-makers’ hands are tied to perform their historical function of buyer of last resort,” he wrote. “It’s then that liquidity will be tested.”

In another of his folksy, rambling, occasionally uncomfortable pieces, Mr. Gross spends much of his time breaking down the liquidity profile of the so-called shadow-banking system (after an extended ode to the shower in his Laguna Beach home that skirted dangerously close to providing far too much information.) His main point is that the real-world effect of the Dodd-Frank law hasn’t necessarily been to make banks less risky, but that it merely transferred that risk, from the well-regulated, capital-cushioned banks to the world of mutual funds, hedge funds, and ETFs that make up part of the shadow-banking system.

Another firm that’s part of that shadow-bank world: Pacific Investment Management Co. Mr. Gross, of course, messily exited Pimco, the massive asset-management firm he co-founded, last September. He worked in a few mentions of his former employer amid the discussion of his concerns about liquidity.

Liquidity has been a red flag in the markets for some time now, ever since the 2008 financial crisis and the 2010 flash crash illustrated just how fast it can disappear. More recently, the unusually fast-paced selloff in the government bond market this spring raised the specter that a flash-crash type of liquidity-starved selloff could hit the bond market....MORE
*Schoolboy translation: "I must follow them for I am their leader."

Here's an imagined scene of Bill leading the journalists in an earlier (1830) French uprising:
Artprint of  La liberté guidant le peuple

Aux Barricades!, Dude.

"Surging Pentair, Peltz’s Latest Target, Boosts Water ETFs" (PNR; PIO; PHO; CGW)

This is a first rate company, I wish Mr. Peltz would go muck-about somewhere else.
From Barron's Focus on Funds:
Activist billionaire investors Nelson Peltz is giving a boost to a cadre of water-themed exchange-traded funds on Tuesday.

U.K.-based Pentair (PNR), whose shares trade on the New York Stock Exchange, jumped 5% after Peltz’s Trian Fund Management revealed a 7.2% stake in the company. Barron’s Ben Levisohn notes that at least one analyst is less than enthusiastic.

Pentair, which makes pumps and valves, is a top holding in water-themed ETFs including the PowerShares Global Water ETF (PIO), PowerShares Water Resources ETF (PHO) and Guggenheim S&P Global Water Index ETF (CGW), all of which are edging the SPDR S&P 500 ETF’s (SPY) gains....MORE
The referenced Levisohn 'Stocks to Watch' post, Pentair: Don’t Chase Trian, is probably correct.

Possibly also of interest:

A Look at the World's First Water-focused Hedge Fund
Since the first Earth Day in April 1970 and more importantly since the establishment of the EPA in December of that year, folks have been trying to make money out of water in the U.S..
Put simply, the returns have not been market-beating.

Because so much of the opportunity was my-little-crony stuff, at the whim of politicians, there was no consistency of growth at a time when other portfolio investments offered very competitive comparisons.
The alternative was to own the cash flow, private equity style, but unless one felt a passion for grit chambers and sludge pans it was pretty pedestrian, utility type ROI.

In fact the most reliable water investment in the U.S. has probably been York Water Company of York PA.
They've been paying dividends for 199 consecutive years and just announced their 575th divi.
The announcement carries the boilerplate "This release contains forward-looking statements".

Anyhoo, here's a piece we've been sitting on since January, from Mother Jones:...
A Look At A Second Water Focused Hedge Fund
Aug. 2012
It's So Hard to Find a Decent Bet on Water (investment vehicles)
May 2013
Swiss Private Bank Pictet Making Money in the Water Biz (XYL; DHR)
July 2013
"Can Powdered Water Cure Droughts?"
October 2010
Muni's: "Water Scarcity a Bond Risk, Study Warns"

And many more, use the search blog box if interested.  

Today Is The Longest Day in Years, Computers at Risk, Here's Why

From The Weather Network:
Today will be the longest in three years as timekeepers add an extra second — known as a leap second — to the official time before Wednesday starts. Here's why.

At just after 23:59:59 p.m. Greenwich Mean Time on Tuesday, June 30, the world will experience a temporal oddity. Clocks around the world will not immediately switch over to next hour, but will pause — for just one second — before doing so.

This inserts a "leap second" into the day, giving us just a moment where the unusual sight of 23:59:60 appears on official clock faces before they switch over to 00:00:01 on Wednesday, July 1.
However, this leap second will also produce a moment when computer systems around the world may suffer problems, as they have in the past.

REMEMBER: The Leap Second occurs at 23:59:60 GMT, which is 9:29:60 p.m. NDT, 8:59:60 p.m. ADT, 7:59:60 p.m. EDT, 6:59:60 p.m. CDT, 5:59:60 p.m. CST, 5:59:60 p.m. MDT, 4:59:60 p.m. PDT.

In 2012, when the last leap second was applied, several websites experienced problems due to the extra time, including FourSquare, Gawker, LinkedIn, Mozilla, Reddit and Yelp. In addition, over 400 Qantas Airlines flights were delayed when the Amadeus airline booking service went down for two hours, forcing staff at airports to switch to manual check-ins for passengers....MORE
HT: MetaFilter

"So accountant trading cards are a thing...."

From Going Concern:

Accountant Trading Cards: I'll Give You a Luca Pacioli If You Give the Accounting Profession Its Dignity Back
Because there’s nothing more thrilling than the adrenaline rush of trading cards combined with the raw excitement of accounting.

Accountant trading cards are similar to the Most-Wanted Iraqis playing cards issued by the Bush administration during the Iraq War. The main difference is that the Most-Wanted Iraqis cards explicitly told soldiers who to shoot; owning accountant trading cards implies that you should maybe shoot yourself....MORE
 Confucius
IMG_0688.JPG
Confucius got his card because, as it says on the back, “First Job: Accountant.” My first job was at a pharmacy which is why I’m considered one of history’s greatest drug lords.
Confucius’s stats include:
  • Career Billable Hours: 1,897 1
  • Deadlines Met: 0 2
  • Religions Founded: 1
Ithamar, son of Aaron; nephew of Moses...
So much MORE 

A Primer on the Greek Crisis

Professor Kashyap is a professor of economics and finance at Chicago Booth and sits in a comfy endowed chair.

From Arnold Kling's Askblog:

Anil Kashyap on Greece
Probably the best analysis so far. Mostly, it is a recap of the past. But in talking about the pending referendum, he writes,
if the public sides with Tsipras government, then there will be a very sharp recession over the next few months. Tax collection is likely to collapse. The Tsipras government is unlikely to survive the economic collapse.
He also writes,
Greece should have defaulted in 2010. Its debt burden then was unsustainable and nothing since then has changed this. It is true that financial markets were much more jittery at that time, but the money that was raised to pay off the creditors in that bailout could have been diverted to support Greece and other weak countries. Once the bad rescue of 2010 was undertaken, it was inevitable that some form of debt relief was going to be necessary.
...MORE

A Primer on the Greek Crisis: the things you need to know from the start until now 
Anil Kashyap University of Chicago, Booth School of Business June 29th , 2015
(7 page PDF)

Uber Term Sheet Offers A Peek At Finances

From Bloomberg: 

Uber Bonds Term Sheet Reveals $470 Million in Operating Losses
Uber Technologies Inc. is telling prospective investors that it generates $470 million in operating losses on $415 million in revenue, according to a document provided to prospective investors.

The term sheet viewed by Bloomberg News, which is being used to sell $1 billion to $1.2 billion in convertible bonds, doesn’t make clear the time period for those results. The document also touts 300 percent year-over-year growth.

The figures show the heavy losses that Uber is accruing as it expands its global car-booking operation amid fierce local competition. Uber is already operating in more than 300 cities worldwide and is raising money at a $50 billion valuation, a person familiar with the situation said last month. Uber is spending aggressively especially in China and as it experiments with its carpooling service uberPOOL.

“These are substantially old numbers that do not reflect business activities today,” Uber spokeswoman Nairi Hourdajian said in an e-mail. Hourdajian declined to say why the numbers are being used to promote a current funding round.

The ride-sharing company co-founded by Travis Kalanick remains fiercely secretive about its financial performance, even with prospective investors.

Hillhouse Capital Management is leading the convertible bond deal, a person with knowledge of the matter said June 23. The bonds can be converted to shares at a discount if Uber goes public.

Bond Terms
Investors in this round will be able to convert the notes at a compounded 11.5 percent discount if the company sells shares on the public market, the document shows....MORE

"Stronger El Niño Could Both Help and Hinder Re/Insurance: KBW"

The property/casualty and reinsurance industries have so much over-capacity they are desperate for new markets/business or risk reduction in existing policies. The next step will probably be lobbying for some sort of mandated coverage.

From Artemis, June 15:
Recent reports that the impending El Niño event in the Pacific Ocean may onset more quickly and be stronger than forecast could be both a help and hindrance to the insurance and reinsurance market, according to analysts at Keefe, Bruyette & Woods (KBW).

Predictions from the NOAA that there’s a greater than 90% chance of El Niño conditions remaining throughout the summer and fall provides a signal to global re/insurers of fewer Atlantic hurricanes. The latest forecasts also show an 85% chance that El Niño conditions will last through winter 2015-16, which could prolong the impacts to weather and climatic conditions from this ENSO cycle.
Latest SST's El Nino
Although seen as a positive for most in the reinsurance industry, the downside says KBW “is that if 2015 proves to be another quiet hurricane year, it’s more likely that double-digit rate decreases will continue for 2016 renewals.”

Contrasting to KBW’s final point, RBC Capital Markets recently said that for European reinsurers, the best-case scenario in current market conditions would be for a continuation of benign catastrophe losses, as a ‘normal’ loss year “would not lead to any uptick or stabilisation of pricing and would only serve to dampen capital returns.”

It’s also possible that a stronger and earlier El Niño event could lead to a hike in the number of Southeastern tornadoes, explains KBW, including a rise in the volume of low-to-moderate severity catastrophe losses. Note: a recent study suggests that U.S. severe thunderstorm and tornado incidence can decline during an El Niño year.

The problem here explains KBW, is that historically “these events can often fall below reinsurance retention thresholds, pressuring primary insurers without much impact to reinsurers.”

Offsetting the negative impact of a rise in tornado activity is the potential for El Niño conditions to increase U.S. rainfall, says KBW. Highlighting that so as long as rainfall isn’t excessive, it can boost U.S. crop yields and help to mitigate drought conditions....MORE

Rare Earth: Largest U.S. Producer, Molycorp Has Filed For Bankruptcy Protection (MCPIQ)

"...Words like "uranium", "rare earths", etc. seem to be magic to
 those unsuspecting who are often fleeced..."
Gerald M. Loeb
The Battle for Investment Survival
Simon & Schuster, 1935

Oh we had fun with this one.
We posted on it pretty much from Tombstone to tombstone.*
There are a lot of lessons for commodity investors wrapped up in this tale.
And for equity investors as well. The stock went from being part of Goldman Sach's odds & sods ends bin to "UPDATED-Rare Earth: "Molycorp Looks Like One Of The Greatest Private Equity Deals Ever" (MCP)"
To last week's filing.

From 24/7 Wall Street:
Molycorp Files for Chapter 11, Delisted From NYSE
When Molycorp (MCPIQ) held its initial public offering in July of 2010, the company priced the shares at $13.25, below the IPO range of $15 to $17 that the company had hoped for. The stock rose to an all-time high of around $77 a share by April of 2011, before collapsing to just over a dime on the OTC Pink market Friday morning, following the stock’s delisting from the New York Stock Exchange. 
The company’s Mountain Pass mine in California was touted as the answer to global dependence on China’s rare earth metals mining industry. In an attempt to clean up the country’s illegal rare earth mining operations  (and to keep global prices high in the face of the threat from Molycorp), China imposed export restrictions on certain rare earth metals. Then the unexpected happened.
Major users of rare earth metals began to explore for substitutes for the expensive minerals — and users found them. Add to that the lifting of China’s export restrictions, and it was just a matter of time before new rare earth mining companies like Molycorp folded....MORE
This brings back memories, Stutz Bearcats, raccoon coats and Molycorp.
I may be confusing my geologic eras here but Molycorp was a wonderful trader back in the day. There were three separate times we had triples in the little bugger, long and short, from the very first tick, July 29, 2010:
Rare Earth Metals: Molycorp IPO Very Weak (MCP) to the May 2011 top tick at $79 and change to Feb. 2012's: Molycorp Earnings: "I Could Not Be More Proud of The Molycorp Family" (MCP)
I hate it when they talk like that, it triggers alarm bells and Sister Sledge tunes....
 Here's a Stutz Bearcat:
In the early '20's the company was majority owned by "a young Wall Street sharpie" who decided to run what appeared to be a successful corner in the stock that ran it from around $100 to $700. He went bust in 1922:
ALLAN A. RYAN FAILS; DEBTS $32,435,477, $27,806,984 SECURED; Stutz Corner Started War Which Made Thomas Fortune Ryan's Son a Bankrupt. 
And the company followed in the middle of the Depression.

Monday, June 29, 2015

Commentary On Greece From the Ramones

Last seen in 2014's "Last Surviving Founding Member of The Ramones Dies At 65"* this song was our theme song from September 2008 to March 2009, displacing Modern English's Melt With You and/or The Scorpions Rock You Like A Hurricane for those six months:


*This piece has had numerous edits. I corrected the age in our headline, made a note that the drummer in the video is Marky not Tommy, changed the attendance figure for the US festival and added some timeline.
Other than that...regret the error etc....

...MORE

There Appears To Be A Problem In Greece: Analysts React

And from the all-Greece, all-the-time station formerly known as FT Alphaville we're groovin' and behoovin with this morning's "Greece: Analyst views on capital controls, bank holidays":
We’ll be slamming up the best of our collective inbox on matters Greece as and when the good stuff pours in.
Catching up on the last few hours, here’s JP Morgan’s Greg Fuzesi:
In light of the deepening crisis in Greece, a key question is how the ECB will respond to any signs of contagion to the rest of the Euro area. At the end of today’s policy statement about the ELA decision, the ECB said that “the Governing Council is closely monitoring the situation in financial markets and the potential implications for the monetary policy stance and for the balance of risks to price stability in the euro area.” The ECB added that “the Governing Council is determined to use all the instruments available within its mandate.” 
We would make three points about the ECB’s likely response. First, the ECB’s tolerance of deteriorating financial market conditions in the Euro area, that are driven by developments in Greece, is likely to be very limited. Hence, it could move very quickly from today’s verbal warning to announcing a policy response.
Second, which tool the ECB will use in the event of contagion will depend on the severity and the form of such contagion. Hence, it will matter whether any contagion occurs via bond markets or via banks, and how it is distributed across countries. The ECB is likely keeping an open mind until it sees how financial markets respond.
Third, as we noted recently, the ECB pledge today to use all instruments available “within its mandate” has been greatly expanded by the recent ruling of the European Court of Justice (ECJ), opening the door to targeted interventions that could be described as an Anti-Contagion Purchase Programme, or ACPP. Hence, the ECB has options other than simply expanding QE or activating OMT....MORE
Steven Englander at Citi, meanwhile, reinforces the point that a monetary union is not a fixed exchange mechanism, which means doomsayers might get spooked yet:
I would estimate that about 40% of the clients I meet think that Greek exit would irrevocably lead to a breakup of the euro zone down the road and we are getting a lot of apocalyptic comments today in the aftermath of recent events. This misses the major difference between a monetary union and fixed exchange rates that the ECB has powers to remedy the situation for other peripherals that simply do not exist in any fixed rate, peg or ERM regime. If the ECB is involved aggressively we may get a risk-on EUR sell-off which would be good the euro zone, the ECB and peripheral assets, even if the EUR is sold…

The Bank For International Settlements Drops Greece from the Eurozone

From the Wall Street Journal:

For BIS, Greece’s Omission Is a Graphic Error
The eurozone has already lost Greece. At least, that’s what a map included in the Bank for International Settlements’ annual report appeared to show when it was first published.

The graphic is part of a chapter that looks at the failures of the international monetary and financial system—which it defines as “the arrangements governing transactions in goods, services and financial instruments among countries.”

One of the problems the BIS identifies with the system is that the monetary policies of the U.S. Federal Reserve and the European Central Bank spread far beyond the borders of their respective economies. In recent years, this has led to a global monetary-policy setting that is weaker than it should be, fueling credit and asset-price booms that are bound to end in tears....MORE
http://www.zerohedge.com/sites/default/files/images/user5/imageroot/2015/06/BIS%20euro%20zone.jpg
 ZH

"Greece Will Default To IMF Tomorrow, Government Official Says"

When I said:
S&P 500 2108.58; all time high 2134.72.
We would not be at all surprised by a decline into early August but, contra Carl Icahn, don't think we've seen the top yet....
last Thursday, I was perhaps assuming more sang-froid than I actually possess.
S&P 500   2057.64 -43.85 (2.09% )
DJIA       17596.35 -350.33 (1.95%)

Two percent moves in major indices still get one's attention.

From ZeroHedge:
Earlier today, as the exchange between Greece and its creditors got increasingly belligerent, Estonian Prime Minister Taavi Roivas told public broadcaster Eesti Rahvusringhaaling in interview that a possible Greek decision to leave euro area wouldn’t soften stance of other EU countries and that Greece’s debt would still remain outstanding and creditors would expect this money back."

"If Greece leaves, the value of their new national currency would decline very fast, so their solvency would still worsen further. They will either have to cut spending or improve their tax revenues. There are no other options."

So did this latest antagonism change the Greek mind? According to a flash headline by the WSJ released moments ago, not all. In fact, Greece just made it official that it would default to the IMF in just over 24 hours....MORE

Sunday, June 28, 2015

London House Prices Approaching £200 Per Brick

From CityAM:

London house prices: The average cost of a single brick in the capital is now just shy of £200
Rocketing house prices in the capital mean the average brick in a London house (RRP: 67p) is now valued at just short of £200, research has found (assuming it's attached to other bricks, and a bit of mortar, that is...).
The research, by online estate agent HouseSimple.com, was based on the fact it takes about 3,840 bricks to build the average mid-terraced home.

Naturally it's the upmarket bricks purchased from the boutique DIY stores of Kensington that have the heftiest price tag, with an average cost of £920. In Westminster, they're a decidedly politically incorrect £764, while the bricks of Camden cost £436. 
At the bottom of the list is Barking & Dagenham, where bricks cost a bargain basement £63 each, while in Bexley they cost £68 and in Havering, they average out at £70.

But figures published today by Emoov suggest that those upmarket bricks may find themselves in rather less salubrious company soon: it reckons demand in Chelsea has fallen 10 per cent in the past month...MORE

Friday, June 26, 2015

Major Integrated Oil Stocks Once Again At Support (XLE; XOP)

The proxy for the majors is the Energy Select Sector SPDR ETF comprised of the biggest oil companies in the S&P 500. $75.68 last, down 15 cents. The multi-year low hit on Jan. 14, $71.70, is less than four bucks away.

From FinViz:
XLE  The Energy Select Sector SPDR Fund daily Stock Chart

I bring this up because the proxy for the smaller companies, the SPDR S&P Oil & Gas Exploration & Production ETF has traded decisively through its rising trend line. Again, from FinViz:

XOP  SPDR S&P Oil & Gas Exploration & Production ETF daily Stock Chart
Although still higher above the January low, in both absolute and percentage terms than the XLE, the little guys are acting as if the hot money that piled in on the up-moves is getting bored and/or scared.

See also May 29's "Chartology: Oil Stocks Are At A Very Interesting Price Level (XLE; XOP)".

And although we had to suffer the slings and arrows of outrageous fortune--you can quote that if you wish--because we've been counseling against getting back on board the love train--ditto--of energy equities as they made these 10-20% up-moves we still think it's too early.

Related:
"Wait For the ‘Second Low’ Before Buying Energy Stocks" (XLE; XOP)
and:

*I'm Troy McClure. You may remember me from such earlier posts as:
Jan. 30

It's too early
"It's Too Early"
Jan. 12
It's Too Early
 
It's (still) Too Early
Jan. 2
It's Too Early 
Dec. 8
It's Too Early
Nov. 29
It's Too Early
Nov. 4
It's Too Early
Oct. 27
It's Too Early
Oct. 22
It's Too Early


Repetitious but at least we varied the type size/face. 
There are quite a few more during the summer-fall of 2014 from before we settled on the three word formulation. 
Going forward we'll try to change it up a bit for our patient (and long suffering) readers.  

EIA Weekly Natural Gas Supply/Demand Report

New NYMEX front month, August, $2.798, down 0.068.

From the Energy Information Administration:

Prices/Demand/Supply:
...Increase in demand is led by power generation. U.S. gas consumption increased by 2.4% this week, with the largest increase in the power sector, which more than offset declines in residential/commercial and industrial sectors. Consumption of natural gas for power generation (power burn) increased by 6.1% during the report week, 24.2% higher than the same week last year. Power burn reached its highest level this year on Tuesday, increasing to 34.4 Bcf/d.... 
...Prices decline in all market locations. Natural gas prices decreased in all market locations last week, despite above-average temperatures across most of the country. The Henry Hub spot price began the report week at $2.93/MMBtu last Wednesday and settled yesterday at $2.77/MMBtu. Prices at other market locations also declined, with the largest declines in the Northeast. Prices at PG&E Citygate, serving Northern California, declined by 3% from $3.23/MMBtu last Wednesday to $3.13/MMBtu yesterday. Prices at the Chicago Citygate decreased by 5% Wednesday-to-Wednesday, closing yesterday at $2.75/MMBtu.

Northeast prices decline. In the Northeast, prices and consumption in the electric power sector fluctuated during the report week in response to varying temperatures and maintenance outages. Gas prices at the Algonquin Citygate, which serves Boston, started the report week at $2.04/MMBtu amid above-average temperatures, declined by 51¢ by Friday, rebounded to $2.51/MMBtu on Monday as temperatures increased again and settled at $1.51/MMBtu yesterday as the heat receded. Prices at the Algonquin Citygate remain historically low, slightly above an all-time record low level of $1.30/MMBtu in early June, and are $2.40/MMBtu below the weekly average for the same week last year. Similarly, at Transcontinental Pipeline's Zone 6 trading point for New York City delivery, the spot price started the report week at $2.91/MMBtu, decreased slightly by Friday, rebounded on Monday as hotter temperatures returned and settled yesterday at $2.54/MMBtu. Prices at the Tennessee Zone 6 200L serving lower New England, also fluctuated during the report week, starting last Wednesday at $2.06/MMBtu and settling yesterday at $1.65/MMBtu. Multiple maintenance-related outages may have contributed to price fluctuations in the Northeast.

Marcellus prices decline. Already-low Marcellus-area prices declined in all trading locations through the week. At Tennessee’s Zone 4 Marcellus location, prices decreased from $1.22/MMBtu last Wednesday to $1.12/MMBtu yesterday. At Dominion South, which serves customers in portions of Pennsylvania, Ohio, Maryland, West Virginia, and Virginia, prices decreased by 22%, from $1.62/MMBtu to $1.27/MMBtu. On the Transco Leidy Line, prices declined by 41¢, from $1.62/MMBtu last Wednesday to $1.21/MMBtu yesterday.

Nymex prices decline. At the Nymex, the July contract began the week at $2.855/MMBtu and fell a dime to close at $2.759/MMBtu yesterday. The 12-month strip, which averages the July 2015 through June 2016 Nymex prices, closed at $3.020/MMBtu yesterday, down 6.6¢/MMBtu from the week-ago price.

Production increases despite maintenance-related pipeline outages. Dry natural gas production increased this week by 1.0% and averaged 72.2 billion cubic feet per day (Bcf/d), 5.4% higher than last year's levels, according to Bentek Energy data. Imports of natural gas from Canada increased by 2.4%, led by 3.7% increase in imports to the western part of the country. LNG sendout decreased slightly, and remained at minimal levels. Overall, supply increased by 1.1% week over week and averaged 77.9 Bcf/d....
...MUCH MORE

Related:
June 19 
Natural Gas--EIA Weekly Supply/Demand Report: Feel the (Power) Burn

China, Russia to Cooperate on Propaganda

Sorry, there's a whiff of Onion about this.
From Xinhua:

China, Russia vow to boost media cooperation
ST. PETERSBURG, Russia, June 25 (Xinhua) -- Liu Qibao, head of the Publicity Department of the Communist Party of China (CPC) Central Committee, met with a senior Russian official Thursday on media cooperation between China and Russia.

In a meeting with Alexi Gromov, first deputy head of the Presidential Administration of Russia, Liu said his department is willing to work with the Presidential Administration of Russia on the integrated development of traditional and new media.

The two sides should look to the future and aspire to innovate bilateral media cooperation based on the integration and development of new media and traditional media, so that they can have larger say in the world's mass media, said Liu, who is also a member of the Political Bureau of the CPC Central Committee and of the Secretariat of the CPC Central Committee....MORE

Forward to the Future: Google's Robot Car Cuts Off Delphi's Robot Car (GOOG; DLPH)

The autonomous finger flips; and, having flipped moves on.
-apologies to Omar Khayyám and his Rubaiyat

Reuters via Reason's Hit & Run blog:

What is the self-driving equivalent of flipping the bird?
Self-driving vehicles are coming sooner to America's highways than many expect. In what appears to be the first of its kind encounter, a tricked-out self-driving Google Lexus rudely cut off a similarly accoutred Delphi Audi in the mean streets of Palo Alto, California. Reuters reports:
The incident occurred Tuesday on San Antonio Road in Palo Alto, said John Absmeier, director of Delphi's Silicon Valley lab and global business director for the company's automated driving program, who was a passenger in one of the cars.

No collision took place.

Google declined to comment.

Absmeier was a passenger in a prototype Audi Q5 crossover vehicle equipped with lasers, radar, cameras and special computer software designed to enable the vehicle to drive itself, with a person at the wheel as a backup.

As the Delphi vehicle prepared to change lanes, a Google self-driving prototype - a Lexus RX400h crossover fitted with similar hardware and software - cut off the Audi, forcing it to abort the lane change, Absmeier said....MORE

Back to the Future: Lexus Introduces A Hoverboard

It's not just a hoverboard, it's a Lexus hoverboard.
Or something.

From the Lexus blog:

Lexus Hoverboard: Amazing in Motion

A Lexus has always been a vehicle that rides on wheels, in contact with the ground. Until now. This summer a new Lexus takes flight, bringing the stuff of science fiction closer to real world fact.
lexus amazing in motion slide
Lexus has worked with experts in super-conductive technology to create one of the most advanced Hoverboards the world has seen. The concept is the fourth project in its Amazing in Motion campaign, demonstrating its commitment to pursuing new possibilities in advanced design and technology.

Mark Templin, Executive Vice President, Lexus International, said: “At Lexus we constantly challenge ourselves and our partners to push the boundaries of what is possible. That determination, combined with our passion and expertise for design and innovation, is what led us to take on the Hoverboard project. It’s the perfect example of the amazing things that can be achieved when you combine technology, design and imagination.”

The Lexus project team has used magnetic levitation with liquid nitrogen-cooled superconductors and permanent magnets to give the Hoverboard frictionless movement of a kind that had been thought impossible.

Although a completely different form of transport, the Hoverboard shares design cues with today’s Lexus cars, including the signature spindle grille. It has also been made using some of the same materials, both high-tech and natural, such as bamboo....MORE

HT: IEEE Spectrum

Follow-up--Q&A With Bill Gates: Robots, Uber and the Role of Government

Following up on yesterday's "Bill Gates On Innovation".
From the Financial Times:
Bill Gates, the founder of Microsoft and co-chair of the Bill and Melinda Gates Foundation, was interviewed by Lionel Barber, the editor of the Financial Times, in front of a live audience. Here is an edited transcript of their conversation.

Why do you believe the rate of innovation is accelerating?
The magic of software is we can take something and figure it out and replicate it for very little cost. The kind of change we’ve had over the past 250 years, we’ll get more than that in the next 50 years.

Can you assure us that the world of Blade Runner, where the robots will take over, that’s some time away, we don’t have to worry about that?
They will be benign for quite some time.

You’re talking about a world of serious labour substitution. What areas of the labour market are most at risk?
For those high-school-educated or below is where there will be substitution. We’ve been destroying manufacturing jobs at quite a rate, and that’s good. It makes things cheaper. People demand more things.
It does mean that if you’re not educating your population very well, you’re going to have a segment of it that if you want to create jobs, those will be almost entirely subsidised activities.

Subsided by who?
By the government, by society, if there is desire to have those people have employment.

In this Uber economy, do you have a message for the London taxi driver?
The real Rubicon there is the self-driving car. Uber is just a reorganisation of the labour pool into a more dynamic form. The serious revolution is when that capability is machine-based.

Are today’s tech companies overreaching?
The guys who invented the steam engine, if you met them you might say they were a bunch of arrogant assholes. But the steam engine still changed the world. It doesn’t matter.

Are these tech companies overvalued?
I wouldn’t go long on a basket of pre-IPO tech companies. I don’t think I’d go short either. Yes, a lot of them are overvalued. But the fact that they are a significant change agent that is changing the rules of the game for everything from drug discovery, agriculture, communications, media and entertainment....MUCH MORE, including video.
Q&A: Robots, Uber and the role of government - FT.com

McKinsey & Co. on the Internet of Things

From McKinsey:

Unlocking the potential of the Internet of Things
June 2015
The Internet of Things—sensors and actuators connected by networks to computing systems—has received enormous attention over the past five years. A new McKinsey Global Institute report, The Internet of Things: Mapping the value beyond the hype, attempts to determine exactly how IoT technology can create real economic value. Our central finding is that the hype may actually understate the full potential—but that capturing it will require an understanding of where real value can be created and a successful effort to address a set of systems issues, including interoperability.

To get a broader view of the IoT’s potential benefits and challenges across the global economy, we analyzed more than 150 use cases, ranging from people whose devices monitor health and wellness to manufacturers that utilize sensors to optimize the maintenance of equipment and protect the safety of workers. Our bottom-up analysis for the applications we size estimates that the IoT has a total potential economic impact of $3.9 trillion to $11.1 trillion a year by 2025. At the top end, that level of value—including the consumer surplus—would be equivalent to about 11 percent of the world economy (exhibit).

Exhibit

Achieving this kind of impact would require certain conditions to be in place, notably overcoming the technical, organizational, and regulatory hurdles. In particular, companies that use IoT technology will play a critical role in developing the right systems and processes to maximize its value. Among our findings:...
...MUCH MORE including Executive Summary and Full Report

Previously on the IoT channel:

Internet of Things: Hardware Startups, The VC Perspective
"Is Your Portfolio Ready for an Invasion of Disruptive Technologies?"
IBM Bets $3 Billion On Internet Of Things (IBM)
"In Vegas, Imagining the Wonders of the Internet of Things"
I'm not feeling so much drawn to the concept as pushed into it....
Nudge This: "The Internet of Things Will Be a Giant Persuasion Machine"
See also:
Barron's Cover: Is the Internet-of-Things Ready-to-Wear?
The Google of the "Internet of Things" (and Morgan Stanley's 96 page IoT report) SPLK; GE
Companies That Will Benefit From The Internet of Things
Questions From MIT's 'Internet of Things Festival'
"Behind the 'Internet of Things' Is Android—and It's Everywhere" (GOOG)
"2013: The year of the Internet of Things"
"General Electric Pitches an Industrial Internet" (GE)
Former Joey Ramone Infatuant Maria Bartiromo Says Bad Things are Coming to the Market
The Internet of Things: Huggies App Sends You a Tweet Whenever Your Kid Pees...
Internet of Things: "GE teams up with AT&T and Intel to conquer the industrial internet. Here’s its plan"
The Internet of Things: Huggies App Sends You a Tweet Whenever Your Kid Pees..
Pew Research: "The Internet of Things Will Thrive by 2025"
Citigroup on the "Internet of Things"
CES 2015: "Samsung's Smart-Home Master Plan: Leave the Door Open for Others"
The Internet of Things: Everything Is Hackable
The Creepiness of the Internet Of Things
Internet of Things: In Which Izabella Approaches Escape Velocity Edition
Yeah, I Got "Your Smart Home": A Journalist Shows Us How to Hack the Neighbors
Too Funny: "Hello Dave" Shows Up On Hacked Google Nest Appliance Control System (GOOG)
The Internet of Things and Google's Home Invasion (GOOG)
"How Smart Houses And Big Data Will Change Real Estate Economics" (just wait 'til your house gets a virus)
Another Day, Another 3D Printing, Robotic Harvesting, Internet-of-Things FarmBot

Commodity Producers Still Struggling (CRBQ)

Lest we forget, overall commodity-producer prices have not recovered.
From FinViz the AlpsFunds Global Commodity Equity ETF:

CRBQ Global Commodity Equity ETF daily Stock Chart
The ETF is weighted 39.88% to agriculture related stocks, here are the top 15 holdings:

SecuritySymbolWeight
MONSANTO COMON6.82%
EXXON MOBIL CORPXOM5.82%
SYNGENTA AG-REGSYNN5.19%
ARCHER-DANIELS-MIDLAND COADM4.11%
DEERE & CODE3.96%
POTASH CORP OF SASKATCHEWANPOT3.54%
CHEVRON CORPCVX3.08%
BP PLCBP/2.12%
AGRIUM INCAGU2.02%
CF INDUSTRIES HOLDINGS INCCF1.99%
MOSAIC CO/THEMOS1.99%
TOTAL SAFP1.93%
ROYAL DUTCH SHELL PLC-A SHSRDSA1.85%
SCHLUMBERGER LTDSLB1.84%
BUNGE LTDBG1.69%

...MORE

Thursday, June 25, 2015

Glastonbury Festival vs. Camp Alphaville

A simple head-to-head comparison of two randomly selected events occurring in the next week or so.



Glastonbury
Alphaville
Master of Ceremonies
None
Cardiff Garcia
Headliners
Kanye West,
Florence+Machine,
Who,
Motörhead
Craig Pirrong,
Kit Juckes,
Luigi Zingales
Willem Buiter
Mystics in Attendance
Dalai Lama
Lionel Barber
Breakout Groups
PANEL: Pussy Riot in Conversation

PANEL: New Frontiers-Fracking, TTIP, Housing Rights

PANEL: 2015 WTF? Trying to Make Some Sense of it All

Energy and the Petrodollar Nexus

The Winner Takes All Model - The
Path to Tech Godhood

The Global Financial Ecosystem
2000-2020: Evolution, Disruption, Calibration
Izabella Kaminska?
Not even close
YES
Telepresence robots
Maybe next year
Yes
Something for the young minds?
Kidzfield
Great Camp Alphaville Quiz and Networking?
Fistfights?
Yes
Maybe

--> --> There's really no comparison.

UPDATED--Bill Gates On Innovation

Update below.
Original post:
The older he gets the more rational Mr. Gates sounds.
Except here.

Unless he is aware of some bio-based breakthroughs that I am not, and there is every chance in the world that he is, the stuff we lump under the rubric of "Technology" does not hold a candle to what took place between, say, 1880 and 1920.

Among other things general electrification made the idiomatic phrase "Hold a candle to..." obsolete.

I've probably mentioned the potential of materials science and manufacturing technology as the basis for the next economy a hundred times on this blog but as of June 25, 2015 the promise of graphene and other metamaterials is still just a promise and the robots are just now coming into their own, 5 to 10 years behind where they could have been.

As an aside, kudos to the headline writer for playing off of Kahneman.

From FT Alphaville:

Innovating fast or slow? Gates vs Wolf edition
At the FT’s 125 forum on Wednesday night, Bill Gates, Microsoft co-founder and Bill & Melinda Gates Foundation co-chair spoke with the FT’s editor Lionel Barber about topics as far ranging as philanthropy, AI, climate change and management.

But if there was one core takeaway from the evening’s discussion it was Bill Gates’ adamant stance on the pace of innovation, which he described as currently taking place at its fastest rate ever. All this, he suggested was leading to a “supply-side miracle” with hugely deflationary consequences for the global economy as a whole. (A truncated version of the interview is now available here.)

Gates further referenced the fact that in some ways the world still lacks clarity on how deflationary technology influences economies or economic systems. Whilst he steered clear of making the claim that the digital revolution can lead to a zero marginal cost world, he did suggest it could get quite close to it.

Furthermore, echoing the views of Google’s AI Deepmind team, he stressed technological advancement — ideally funded on the R&D level by public governments because whilst billionaires like him can offer a lot of support, they can’t tilt the playing field alone — would be key to solving the climate change challenge.
(*Sadly nobody asked him whether being annihilated by a rogue climate-change-solving AI which equates climate change with “the people virus” is a greater existential threat to humanity than climate change alone.)
But perhaps it’s also the case that none of the above might ever happen either way, because Gates perspective on the rate of innovation is wrong.

Innovating slower than Bill thinks we are
Juxtapose his view, for example, with that of the FT’s Martin Wolf, by way of his latest piece for Foreign Affairs entitled “Innovation and growth: same as it ever was“....MORE
Update:
Follow-up--Q&A With Bill Gates: Robots, Uber and the Role of Government

"...Why Are WTI Prices Stuck at $60/Bbl?"

WTI $59.83 down 44 cents.
From RBN Energy:
Prices for prompt delivery of West Texas Intermediate (WTI) crude as quoted on the CME/NYMEX futures exchange fell by 60% from their high over $107/Bbl in June 2014 to a low under $44/Bbl on March 17, 2015. After recovering about 37% in April and May WTI prices have remained stuck close to $60/Bbl ever since - closing yesterday (June 23, 2015) at $61.01/Bbl. With market contango narrowing, inventory levels falling, and refinery throughputs rising – why aren’t prices moving higher faster?  Today we review the fundamental data.

For the past year oil market analysts have been busier than shrinks after Thanksgiving – trying to explain what happened and what comes next - since crude prices started falling in June 2014. As we explained last fall the root cause for the price meltdown was a worldwide increase in crude supplies coupled with a downturn in demand (see Crude Falls To Pieces).  Crude from U.S. shale based production has been increasing at the rate of 1 MMb/d a year for the past three years - pushing out imports into the world market and creating increased competition between producers to retain their market share and placing downward pressure on prices. When producer group OPEC failed to signal any intent to try and prop up prices at their Thanksgiving meeting the rout gathered pace (see Crying Time At OPEC). With too much crude and too few buyers the market condition known as contango developed where future prices are expected to be higher than spot prices today – encouraging the use of storage to “save” cheap crude today for use when prices recover (see Skipping The Crude Contango).

Without new sources of demand or supply interruptions, a contango market keeps downward pressure on today’s market prices as storage fills up and becomes more difficult and expensive to find – increasing the contango spread required to cover storage costs (see Fly Me To The Moon). In March of 2015 we described how sky-high inventory levels were still keeping up the downward pressure on crude prices (see Tank House Blues). More recently we posted a blog at the beginning of June (2015) suggesting that low crude prices were here to stay in a new era of abundance (see Houston We Have A Problem). Other analysts contend that the narrowing contango, falling inventory levels and increased refinery demand seen recently – coupled with a slow down in crude production – are signs that prices should recover further this year.  In this two part blog series we look at the impact of evolving fundamental signals on prices.

We start with contango in the CME/NYMEX WTI futures market over the past year. The chart in Figure #1 shows the spreads between WTI prices quoted for delivery six months out (blue line) and one year out (red line) respectively and prices for prompt delivery (light green line). The key to understanding the chart is to look at where the spreads are relative to the light green zero line. If the spreads are above the zero line the market is in contango (meaning future prices are higher than today - orange arrow) and if the spreads are below the zero line the market is in backwardation (future prices are lower than today – black arrow). As you can see the WTI market crossed from backwardation to contango during early November 2014 and the contango spread for 12 months out peaked at about $12/Bbl in March 2015 with the 6 month spread getting as high as $8/Bbl. Since mid-March 2015 the 12-month contango has narrowed to under $3/Bbl and the 6-month contango to under $2/Bbl (see green dashed circle on the chart). Generally speaking a wide contango incentivizes traders to store barrels today in order to retrieve them later at a higher price – as long as the spread covers the cost of storage. As we shall see in a minute the recent narrowing WTI contango spread has made crude storage considerably less profitable – bringing to an end a massive crude inventory build up.
Figure #1; Source: CME data from Morningstar (Click to Enlarge)

...MUCH MORE

Jeremy Grantham at Morningstar's Investment Conference: We're Closing In On Bubble Territory

S&P 500 2108.58; all time high 2134.72.
We would not be at all surprised by a decline into early August but, contra Carl Icahn, don't think we've seen the top yet.

In a series of posts I called Grantham Through the Looking Glass we tracked the usually dour Mr. G:
...Previously on Grantham through the looking glass:
Mar. 15, 2014
Barron's Interview: "Jeremy Grantham: Learning to Live With a Stock Bubble " (Quick, Hire a Kid!)
July 18, 2014 
Jeremy Grantham: M&A Boom Poised For a ‘Veritable Explosion’
July 19, 2014 
If You Want to Make Serious Money Listen to GMO's Jeremy Grantham Right Now
Oct. 24, 2014
Revisiting Jeremy Grantham's Bullish 2 Year Outlook
Nov. 18, 2014
"Jeremy Grantham's Bubble Watch Update: 'S&P To 2250 Before It Crashes'"
Nov. 19, 2014
More Jeremy Grantham: "Calling the Next Market Top"
Here's the latest from Morningstar:

Grantham: No Bubble, Yet

The GMO chief strategist advises prudence but says the market may well move even higher from here.
The market is creeping toward bubble-land but isn't there quite yet, said GMO chief investment strategist Jeremy Grantham during his keynote at the 2015 Morningstar Investment Conference. He warned investors to pay careful attention as valuation metrics begin to approach a "2 sigma event," or 2 standard deviations away from the norm.

"Every 2-sigma event is followed by an equal and offsetting 2-sigma reversion," he said, adding that the pattern occurred in 28 out of 28 of the major bubbles GMO has studied throughout history. "And they all went back half a year quicker than they went up," he added.

So, where's the mean and where are we today? Grantham cited a 21.1 price-to-earnings multiple on the S&P today versus a normal P/E of 16.0, while corporate profit margins are currently at 7.3% versus a norm of 5.7%. In a recent commentary, he further noted that the "Shiller P/E and Tobin's Q have moved up over the last six months to 1.5 and 1.8 standard deviations (sigma), respectively." (Tobin's Q is a ratio comparing the market value of a company to the replacement value of that company's assets). Reversion to the mean on those two scores implies a more 50% decline in the market from current levels, he said.

A Sluggish Reversion
But although profit margins have been abnormally high, they have been curiously slow to revert to historical norms, Grantham noted. "My belief is that it has a lot to do with a regime shift to the Greenspan era and his acolytes," he said. "The [market] P/E in the new regime has been 60% higher than it was for 100 years before."

In addition, he argued that the rise of stock options in executive compensation has played a role in making profit margins stickier--but not without a cost.

"We've entered a world where 80% of remuneration comes from stock options combined with ... a fixation on short-term profit maximization," which encourages CEOs to undertake stock buybacks versus capital expenditures. A buyback is "much less dangerous than buying a new plant," Grantham said, and also happens to increase the value of those stock options by directly boosting the stock price.

For its part, the current Fed regime's low-rate policies have "made it desperately appealing to borrow cheap debt to buy your own stock back." The result has been dismal corporate capital expenditures, which in turn depresses wage creation and does little to stimulate the economy.

"You get mean reversion if capitalism is allowed to work in the normal way," Grantham said. "What's happening in the stock market now amounts to interference with the normal process. We're not allowing profit margins to mean revert. We're not expanding our economy. We're running away from it and protecting our stock options. There is no arbitrage mechanism, and unless we break it, it will be an increasing drag on our economy."

What Will Finally Pop the Coming Bubble?
"You need a trigger to break it," Grantham said. "Broad overvaluation [alone] has never done it."...MORE
HT: Institutional Imperative

And, because we know you're curious:

Feb 2010
"Grantham’s ‘Horrifically Early’ Calls Challenge GMO"

March 2014
How Good Is Jeremy Grantham's Forecasting Record?
His strong pessimism drives GMO managed funds toward the most stable (large capitalization) value stocks, and these funds have performed fairly well (reflecting perhaps a value premium rather than market timing).