Friday, November 27, 2015

Researchers Teaching Robots How To Best Reject Orders From Humans

I thought this question was answered with "I'm sorry Dave, I'm afraid I can't do that". *
From IEEE Spectrum:

Researchers Teaching Robots How to Best Reject Orders from Humans
The Three Laws of Robotics, from the 56th edition of the “Handbook of Robotics” (published in 2058), are as follows:
  1. A robot may not injure a human being or, through inaction, allow a human being to come to harm.
  2. A robot must obey the orders given it by human beings except where such orders would conflict with the First Law.
  3. A robot must protect its own existence as long as such protection does not conflict with the First or Second Laws.
Pretty straightforward, right? And it’s nice that obeying humans is in there at number two. Problem is, humans often act like idiots, and sometimes, obeying the second law without question is really not the best thing for a robot to do. Gordon Briggs and Matthias Scheutz, from Tufts University’s Human-Robot Interaction Lab, are trying to figure out how to develop mechanisms for robots to reject orders that it receives from humans, as long as the robots have a good enough excuse for doing so.

In linguistic theory, there’s this idea that if someone asks you to do something, whether or not you really understand what they want in a context larger than the words themselves, depends on what are called “felicity conditions.” Felicity conditions reflect your understanding and capability of actually doing that thing, as opposed to just knowing what the words mean. For robots, the felicity conditions necessary for carrying out a task might look like this:
  1. Knowledge: Do I know how to do X?
  2. Capacity: Am I physically able to do X now? Am I normally physically able to do X?
  3. Goal priority and timing: Am I able to do X right now?
  4. Social role and obligation: Am I obligated based on my social role to do X?
  5. Normative permissibility: Does it violate any normative principle to do X?
The first three felicity conditions are easy enough to understand, but let’s take a quick look at four and five. “Social role and obligation” is simply referring to whether the robot believes that the person telling it to do a thing has the authority to do so. “Normative permissibility” is a complicated way of saying that the robot shouldn’t do things that it knows are dangerous, or more accurately, that a thing is okay to do if the robot doesn’t know that it’s dangerous....MORE
* Dave: Open the pod bay doors, HAL. 
   HAL: I'm sorry, Dave. I'm afraid I can't do that.

"Black Friday Sales Numbers Are Useless And Wrong "

Scrum down: Customers push each other out of the way as the crowd surges towards widescreen televisions at the Asda store in Wembley

From FiveThirtyEight, Nov. 25:
Sometime on Thursday, after the football game and the second slice of pie, you might turn on the television and see a cheerful local news reporter standing outside a mall and reporting on the long lines of deal-seeking shoppers. Or maybe it will be a Friday morning headline proclaiming, “Black Friday crowds signal strong holiday season.” Or perhaps the news will be grimmer, and the headline will read, “Sparse crowds worry retailers.”

You should ignore these stories.

On Sunday and Monday, the stories will become more definitive, with actual numbers. They’ll say that Black Friday sales rose 2.5 percent from a year earlier, or fell 5 percent. They’ll quote experts on what the weekend sales meant for retailers, for the economy, for the election.
You should ignore these stories, too.

It’s understandable that journalists, economists and other observers would want an early peek into Americans’ holiday shopping plans. Consumer spending makes up roughly 70 percent of the U.S. economy, and the holiday season accounts for a disproportionate share of that spending. Nearly a fifth of retail sales come in November and December,1 and for many specific sectors, the share is even greater. Consumer spending may be even more important to the health of the economy than usual this year, when other sectors of the economy such as manufacturing have shown signs of slowing down.
 Shoppers wrestle over a television at an Asda superstore in Wembley
Unfortunately, preliminary Black Friday reports contain almost no useful information about the state of the economy. The first round of stories — the ones on Thursday evening or Friday — are driven almost entirely by anecdote: How many people showed up at the mall where a TV crew happened to set up its cameras? How long do the lines seem to be compared to last year, according to a mall manager with a vested interest in making sales look good? How much was spent by the handful of families willing to talk to journalists on their way back to the car? These stories help fill airtime on what is typically a slow news weekend, but they aren’t good for much else.
Image result for black friday fight
The second round of stories, on Sunday evening or Monday morning, at least attempts to move beyond anecdote into real data. But as blogger and investor Barry Ritholtz has argued for years, early Black Friday sales figures are at best unreliable and at worst completely useless for predicting overall holiday sales....MORE

Sustainable Energy Company Abengoa May Not Be Sustainable (ABY)

ABY is Abengoa's U.S. listed yieldco which, because of cross-default provisions, may be at risk should the parent become Spain's largest ever bankruptcy.

The Financial Times' fastFT feels the creditor's pain: 

Abengoa's credit rating cut five notches by S&P


Better late than never, perhaps. Standard & Poor's has downgraded Abengoa, two days after the Spanish renewable energy group announced it will start insolvency proceedings.

Typically downgrades occur one or two notches at a time, but S&P has hurled Abengoa five notches lower in one fell swoop, taking it down from B+ to CCC-, just two away from default.

Abengoa was forced to commence solvency proceedings when a planned €350m capital injection from the Gonvarri group fell through at the last minute. The company's shares were suspended during the release of this announcement on Wednesday, then plunged 70 per cent when trading resumed....MORE
While Reuters' Breakingviews says:

Abengoa has creditors over a barrel
The authors are Reuters Breakingviews columnists. The opinions expressed are their own.
Spain’s Abengoa has its creditors over a barrel. The engineering and renewable energy group is seeking court protection from its creditors after a new investor backed out of providing fresh equity. The group might survive if creditors accept a haircut of two-thirds and new cash can be found. In liquidation, losses would be much worse.

The starting point is how much debt Abengoa, which builds, operates and then sells infrastructure like solar plants, can handle. The debt for which it is directly responsible totals 7.9 billion euros, equivalent to nearly eight times its EBITDA for the past year. Assume Abengoa can make 750 million euros of EBITDA a year, and a reasonable amount of leverage is 2.5 times that, and borrowings would need to be slashed to 1.9 billion euros, implying a recovery of just 35 percent for current creditors.

Yet Abengoa’s bonds are trading lower, some around 15 percent of face value. That’s partly because the outcome could be much worse if Abengoa is declared insolvent. That is a real risk, because its business model requires lots of capital. Cash is likely to drain away if banks refuse to roll over working capital loans or customers withhold payments. And if Abengoa can’t keep building, some 2 billion euros of performance bonds – issued to customers as a guarantee that projects will be built on agreed terms – could become due....MORE

Gold Drops to 6-Year Lows

There was a tiny amount of backwardation earlier but that has flipped back to very mild contango. $1056.5, down $13.50 on the front futures after trading as low as $1051.10. Although we are still looking for $875 before all is said and done (and looking at the gold commentators, more is said than done) there is a real possibility of an overshoot to the downside.

Amateurs and guys paid by the word will tell you backwardation in gold is a sign of strong physical demand but that's just not so. See for example "Indian gold demand seen falling to 8-year low in festive quarter". Backwardation is often the result of financial shenanigans or even something as simple as a lack of demand down the road.

As to the latter, a strong (and still strengthening) dollar makes gold cheap in $ terms and another 6% move in the buck drops gold out of four figures. Combine distaste for a wasting (price) asset and the move down continues without need for conspiracy theories.
Further, as the story points out, real rates matter.*

Here's the headline story from Reuters:

Gold slips to near 6-year low, set for 6th straight weekly drop
* Dollar at 8-1/2 month peak of 100.17* Silver, platinum, palladium head for weekly declines
* Chinese buying unable to support prices (Updates prices, adds comment)
Gold slipped almost two percent to a near six-year low on Friday and was heading for a sixth straight weekly decline under pressure from a firm dollar and prospects of a U.S. interest rate rise next month.
Spot gold hit $1,052.46 an ounce, its lowest since February 2010, and was down 1.5 percent at $1,055.06 by 1428 GMT.

Spot prices were down 2.1 percent for the week. U.S. gold futures fell 1.3 percent to $1,052.49 an ounce and were also headed for a sixth consecutive weekly decline.

Gold was undermined by a firm dollar, trading at an eight-month high against a basket of major currencies, mostly boosted by euro and Swiss franc weakness.

The dollar-denominated metal becomes more expensive for foreign investors when the U.S. currency rises.

"Since 2012 we have been in an environment where lower real rates and higher equity risk premium have both been strong and negative factors for gold," Deutsche Bank analyst Michael Hsueh said....MORE
June 12, 2013
or, that time I was crabby, on:
Aug. 22, 2013
I have become very reluctant to link to most economist's blogs. More and more it seems economists are nothing more than wannabe politicians who don't have the guts to run for office and who, instead, gussy themselves up in a bit of math before finding an echo chamber to preach their politics to.
Life's too short.

However, here's a guest post by a student who seems not to have picked up the playground-squabble tone that so much econ writing exhibits these days.

Plus, for me anyway, it just oozes confirmation bias....
...Focus on Funds points out the use of TIPS for the measure whereas I used the 10-year treasury -YoY for my quick-and-dirty.
At least two readers emailed the St. Louis Fed's "5-Year Treasury Inflation-Indexed Security, Constant Maturity" chart:
 Graph of 5-Year Treasury Inflation-Indexed Security, Constant Maturity

Some folks use Fed Funds as the measure but that doesn't make a lot of sense.
Last December Izabella used TIPS in one of her posts which we finally got around to in January.
From our "Spot Gold Down $21.80 as HSBC, Credit Suisse Lower Forecasts (GLD)":
Back in early December FT Alphaville's Izabella Kaminska modestly wrote in "Capping the gold price":
The following chart, we propose, has the potential to inspire a whole new way of looking at the gold and Treasury market...
Now if you cut out the upside (...Capped) you are left with the semi-variance which means you can figure out all kinds of extremely high reward bets.

As I said in April's "Gold Hammered to 15 Month Low on Heavy Technical Selling, Weak Long Liquidation":
Woulda, coulda, shoulda.
If I had been paying attention when Izabella Kaminska wrote "Capping the gold price" , I'd have more chips to play with.
Alphaville posted it on December 7, 2012, five days before the $1715 intermediate term top.
Instead it took me four weeks to get around to it, Jan. 3, with "Spot Gold Down $21.80 as HSBC, Credit Suisse Lower Forecasts (GLD)"
Here's the trading from that day:
As you can see, my thought process was something akin to "Saaaay, something appears to be happening with gold". We just hadn't been paying attention....
$1276.80 last....
November 27, 2015: $1056.30, we're going lower.

Wednesday, November 25, 2015

Thanksgiving and Beer

First posted November 27, 2013:

From a 2011 email to a friend:
So Thursday was beautiful and around 1:00 p.m. I said "I'd like a beer".
Rather than "Here let me get one for you" my interlocutor says "You and Samoset".
Being quick-witted I respond "Huh?"
And receive "You remember Samoset?"
"Uh, sure. Samoset, Squanto and Massasoit, right?"
"Look it up"

So I do.

March 16, 1621
The Pilgrims made it through that first winter, spring is coming and lo-and-behold, so is one of the locals.
The Pilgrims grab their guns shouting "Indians, Indians" and he continues walking right into the middle of their camp and says:


After the Pilgrim version of "WTF" they say "Welcome".

The big guy responds "I am Samoset".

Time for another quick "WTF" before he continues:

"Have you any beer?"
"Friday, the 16th, a fair warm day towards; this morning we determined to conclude of the military orders, which we had begun to consider of before but were interrupted by the savages, as we mentioned formerly. 
And whilst we were busied hereabout, we were interrupted again, for there presented himself a savage, which caused an alarm. He very boldly came all alone and along the houses straight to the rendezvous, where we intercepted him, not suffering him to go in, as undoubtedly he would, out of his boldness. 
He saluted us in England [English], and bade us welcome, for he had learned some broken English among the Englishmen that came to fish at Monchiggon [Monhegan Island], and knew by name the most of the captains, commanders, and masters that usually came. He was a man free in speech, so far as he could express his mind, and of a seemly carriage. We questioned him of many things; he was the fist savage we could meet withal. He said he was not of these parts, but of Morattiggon [Monhegan Island or Pemaquid, Maine], and one of the sagamores or lords thereof, and had been eight months in these parts, it lying hence a day's sail with a great wind, and five days by land. He discoursed of the whole country, and of every province, and of their sagamores, and their number of men, and strength. 
The wind being to rise a little, we cast a horseman's coat about him, for he was stark naked, only a leather about his waist, with a fringe about a span long, or little more; he had a bow and two arrows, the one headed, and the other unheaded. He was a tall straight man, the hair of his head black, long behind, only short before, none on his face at all; he asked some beer, but we gave him strong water and biscuit, and butter, and cheese, and pudding, and a piece of mallard, all which he liked well, and had been acquainted with such amongst the English."
Mourt's Relations, Edward Winslow, 1622
 (damn near contemporaneous, eh?)
There is no record of Samoset being at the harvest feast of 1621 but he helped make it happen and because he did, 213 years later, in ca. 1934, Macy's could do this:
-The Macy's Thanksgiving Parade Balloons Used to Be Extremely Creepy

Paris Review On Thanksgiving

From the Paris Review, November 24, 2014:

You know how J. M. W. Turner tried to exhibit his work at the Royal Academy and the Royal Academy was all, Wow, your work is way too innovative and interesting and we can’t show it because it would threaten all our hidebound, bourgeois ideas and force us to reevaluate everything and make important societal changes? Yeah, well, I totally see their point. Once a year, anyway.

Because every November, all the food magazines and blogs start trying to bully us into to reinventing the wheel. Don’t be a fogey! they scream. What, you’re still eating turkey? HAHAHA. Well, if you insist on being a “traditionalist,” stuff that turkey with linguica and kale! Baste it with ramen! Douse it in pomegranate molasses! (All this is said in a vaguely threatening, SportsCenter-style cadence.) This isn’t your mom’s green bean casserole! You’re not even seeing those losers, are you, with their stupid political views and opinions about your love life? Surely you’re having some awesome no-strings Friendsgiving celebrating the new family you’ve chosen! Right? RIGHT?! SRIRACHA. SRIRACHA. SRIRACHA.

Look. I get the market demands of the newsstand. You can’t just recycle the same stuff year after year. Nor do I mean to advocate a slavish adherence to tradition. In my family’s case, that would mean cleaning the dining room table off in a panic at the last minute, barring entrance to the rooms where we’ve stuck all the mess, then watching my mother stand in front of the digital meat thermometer with tears rolling down her cheeks.

My own practices are less ambitious. I like order, I like guaranteed results, and I like perfection.

Is this lonely? Yes. Tyranny is lonely....MORE
I can totally see the Royal Academy as all "Wow, your work is way too innovative..."

Izabella Kaminska and the Tech Rentiers

With a title like that I feel I should commission a graphic novel.
From Dizzynomics:

Tech rentiers
I was going to start this post by saying I almost never disagree with anything Bloomberg’s Matt Levine writes. But then I realised that would be wrong. I never disagree with him.

Until today that is.

(Although, to be fair, the disagreement is more of a supplementary pedantic comment than a disagreement outright. I’m being annoying.)

To cut to the chase I think Levine may have missed a trick in his Monday note commenting on how hedge funds/banks are increasingly focused on poaching talented techies rather than traditional trader types for their industry.

Here’s the relevant part:

Here is a story about how “hedge funds and asset managers are scrambling to poach talent from Silicon Valley” so they can program computers to do more good trading stuff. One reaction that you often see to this sort of news is that it is a waste for smart computer scientists to work in the financial industry, because they should be changing the world by programming self-driving cars or computers that cure cancer or whatever.

This is of course a bit irrelevant to the actually existing tech industry, which mostly optimizes advertising. Also, though, the point of hiring computer scientists in finance is to automate functions of the financial industry. If you accept that allocating capital is a worthwhile social function, then automating it so that fewer people can do it more efficiently is also worthwhile.

And, then you need fewer people to allocate capital. So all those human traders who used to allocate capital based on gut instinct and favor-trading are freed up to do whatever more socially valuable thing it is that they should be doing.

So, as a whole, I mostly agree.

But I’m also acutely aware that I nearly suffered a mini-seizure in the middle of Waterloo station because my suddenly iPhone wouldn’t cooperate when I was trying to copy and paste a simple extract into this blog. Which kinda sums up my feelings about over-relying on information tech.

So yes, value allocation is mostly a low-value rentier business, which could do with being disrupted for the sake of the real economy. I get that. That’s the argument that fintech people put forward all the time. Having one techy do the jobs of four traders is much more efficient, boosts margins for every financial firm involved whilst lowering the financial sector’s footprint on the real economy.

But does it really do that? Really?...MUCH MORE
Although she doesn't mention it, the next phase for 'tech' companies is always the urge to political power.
It can be something as straightforward as Google rising to the top of the heap among corporate lobbyists at the Federal level or as insidious as 'disruptors' going directly political at the local level.

The political problem is and has always been that the people most drawn to being in the ruling class* are exactly those you would least want to have power.

*In democracies the urge to rule has to be cloaked in the words of governance lest the naked power grab be too off-putting for the electorate.

By-the-bye, here is the original article Mr. Levine uses for his mini-riff: "Hedge funds poach computer scientists from Silicon Valley".

Tuesday, November 24, 2015

"Debate: Does Longevity Put a Strain on the Economy?" (GE)

From GE Reports:
Nov 24, 2015 by Daniel Callahan, Co-Founder and President Emeritus of the Hastings Center
The question that’s often overlooked in the debate over longevity is not whether we can — but whether we should — radically extend life expectancies. The clear answer is, no.  
I have spent many of my 85 years thinking about old age, what it means and what we might do about it. There is always something disturbing about the debates I have with enthusiasts for radically extending life expectancy. The topic is typically introduced with three cheers for life extension beyond our present boundaries, followed by exciting — sometimes breathless — talk about all the scientific breakthroughs on the horizon that would get us there. I always try to stir up interest in the question, “But is that a good idea?” 
Few seem prepared to even discuss the question of not can we — but should we — extend life as far as possible. The answer seemed to be self-evident answer: No one likes to get old, do they? But I think the question is unavoidable, and the answer is clear: Life extension a glaringly bad idea. 
There are there two ways of thinking about significantly extending life expectancy, by which I will mean well over 100: what we as individuals might like, and what might be best for the human community. I have seen several public opinion surveys from different countries showing variable responses to the question of how long individual people would like to live. In Australia, a surveyfound that 80 would be long enough for most. In Germany, a study found 85 to be the ideal. And in America, two separate surveys found 90 to be the desired age. In none of them was there much desire to live beyond 100....MORE
Well there you go, I guess Mr. Keohane was right.

Should Pearson Decide to Sell Its Stake, Bertelsmann Seeks Partner to Buy Penguin Random House

From peHUB:
European media giant Bertelsmann (BTGGg.F) is looking for a private equity partner to help it buy the rest of publisher Penguin Random House should co-owner Pearson (PSON.L) want a swift exit from the business, three sources told Reuters.

Privately owned Bertelsmann controls 53 percent of the publisher of bestsellers such as the Fifty Shades series and Lee Child’s Jack Reacher thrillers.

Announced in 2012, the venture brought together two of the biggest names in book publishing, with the Penguin imprint and logo a familiar sight on bookshelves around the English-speaking world.

Pearson and Bertelsmann initially committed to holding their shares for at least three years and each partner has the right of first refusal thereafter should one want to sell.

They also agreed that from five years after completion of the deal either partner can require an initial public offering (IPO) of the publisher....MORE
In the words of former President Bush:
 “There's an old saying in Tennessee — I know it's in Texas, probably in Tennessee — that says, fool me once, shame on — shame on you. Fool me — you can't get fooled again.”

"DARPA seeking novel mathematical frameworks for understanding and representing complexity"

We are still at least a decade away from being able to model systems that are both complex and chaotic. Fortunately you can get a lot done by understanding nonlinear jerk systems.
Now, could I get all the jerks to line up on the outside of the butterfly wings...

From Next Big Future:
Complex interconnected systems are increasingly becoming part of everyday life in both military and civilian environments. In the military domain, air-dominance system-of-systems concepts, such as those being developed under DARPA’s SoSITE effort, envision manned and unmanned aircraft linked by networks that seamlessly share data and resources in real time. In civilian settings such as urban “smart cities”, critical infrastructure systems—water, power, transportation, communications and cyber—are similarly integrated within complex networks. 
Dynamic systems such as these promise capabilities that are greater than the mere sum of their parts, as well as enhanced resilience when challenged by adversaries or natural disasters. But they are difficult to model and cannot be systematically designed using today’s tools, which are simply not up to the task of assessing and predicting the complex interactions among system structures and behaviors that constantly change across time and space. 
To overcome this challenge, DARPA has announced the Complex Adaptive System Composition and Design Environment (CASCADE) program. The goal of CASCADE is to advance and exploit novel mathematical techniques able to provide a deeper understanding of system component interactions and a unified view of system behaviors.  
“CASCADE aims to fundamentally change how we design systems for real-time resilient response within dynamic, unexpected environments,” said John Paschkewitz, DARPA program manager. “Existing modeling and design tools invoke static ‘playbook’ concepts that don’t adequately represent the complexity of, say, an airborne system of systems with its constantly changing variables, such as enemy jamming, bad weather, or loss of one or more aircraft. As another example, this program could inform the design of future forward-deployed military surgical capabilities by making sure the functions, structures, behaviors and constraints of the medical system—such as surgeons, helicopters, communication networks, transportation, time, and blood supply—are accurately modeled and understood.”...MORE

Business Insider's Parent, Axel Springer, Is Suing An Adblocker

From harknesslabs:
Are Adblock companies legal?
Today brought the news that Axel Springer, the media giant that recently bought business insider for 343 million is suing a ad blocker. Many would balk at this action, claiming that ad blocking is inherently legal and that this is just a dinosaur grasping for any method they can to grab any dollars on the ground. 
The thing is though, ad blockers may very well be illegal in the USA. In fact, very similar cases have been tried in court before, but in a very different medium: Online game hacking. I wont blame you for not initially seeing the parallels, but they are in fact very similar businesses.

Lets compare Adblock Plus and MDY Industries. MDY made and sold a ‘bot’ (a program that played the game for you, to accumulate more in game gold) for Blizzards World of Warcraft. Blizzard was not happy with this as it felt it made the overall economy worse for players and that it was prohibited by their terms of service. Blizzard took MDY to court and won (more on this later).

Adblock Plus gives away software that lets end users block advertisements on all websites. Some websites may have language in their Terms of Service forbidding access with a adblocker enabled. 
The similarities if you did not catch them are this: The platform (websites, blizzard) have a contract with a user (gamer, website visitor) saying they cant do something. The user then decides they want to do that bad thing anyways. The offender (MDY, Adblock plus) provides software that lets the user do this bad thing.

There is a law on the books which deals with this very issue and its called Tortious Interference. Wikipedia says: “Tortious interference with contract rights can occur where the tortfeasor convinces a party to breach the contract against the plaintiff, or where the tortfeasor disrupts the ability of one party to perform his obligations under the contract, thereby preventing the plaintiff from receiving the performance promised. The classic example of this tort occurs when one party induces another party to breach a contract with a third party, in circumstances where the first party has no privilege to act as it does and acts with knowledge of the existence of the contract. Such conduct is termed tortious inducement of breach of contract.”...MORE

Monday, November 23, 2015

"Why and how do Munger and Buffett “discount the future cash flows” at the 30-year U.S. Treasury Rate?"

From 25iq:
Buffett and Munger use several methods which are at odds with traditional financial theory. Here is one of those nontraditional approaches:

Buffett: “We don’t discount the future cash flows at 9% or 10%; we use the U.S. treasury rate. We try to deal with things about which we are quite certain. You can’t compensate for risk by using a high discount rate.”

There is no law of nature requiring that a capital allocation process account for risk, uncertainty and ignorance by adjusting the interest rate. Buffett and Munger instead use the concept of margin of safety. Having a margin of safety and also adjusting the interest rate would be redundant in their view. They: 
1. Assemble options to invest that involve businesses which have a future that is “quite certain” and is within their circle of competence
2. Use the 30 year rate to do the DCF in their head on all these opportunities
3. Apply a margin of safety
4. Compare every option available to then anywhere on Earth and chose the best one.

This makes some people nuts since they were trained to adjust the interest rate to account for risk. I’m not taking a personal position here and am instead trying to better explain the Buffett/Munger approach.

The two methods are different ways of accomplishing the same thing, so why do Buffett and Munger use their own approach? I believe they prefer their method since it frames the ultimate question in a way that they prefer. They hate the idea of someone saying “invest in X since the return is above your hurdle rate” since that decisions can be made only by looking at every other alternative in the world. By using the same 30 year US Treasury rate for every DCF he has created a “system to compare things.” The things Buffett compares side-by-side must be “quite certain” and available to buy at a significant discount to intrinsic value reflecting a margin of safety.

My friend John Alberg a co-founder of puts it this way:

“Another way of saying it is that all investments share the same discount rate. You can’t apply a different discount rate to company A than company B because $1 in the future is worth the same amount of money regardless of whether it comes from company A or B. So instead an investor should focus on the cash that a business can generate within a margin of safety and compare them by that measure. With respect to DCF, the reason that it can be “done in the head” is because it simplifies to a simple ratio when you use margin of safety. That is, if most future cashflows from company A are going to be greater than some number c_A and the discount rates are going to be greater than some other value r then the quantity c_A / r is less than the result you would get from a DCF. Put another way, the quantity c_A / r is a lower bound on the DCF or it is an estimate of intrinsic value with a margin of safety. But notice that if you are comparing the intrinsic value of two companies with cashflows of at least c_A and c_B then the discount rate r is constant between the two and therefore not the important part of the equation.”

Buffett and Munger have a flow of deals that cross their desks. We don’t see them but Byron Trott recently said that many investors would cry over losing what they turn down. That flow established their opportunity cost. 30-year US treasury rates can be 3%, but if they have a flow of deals that return 10% that is “sort of” their hurdle rate.

Munger: “We’re guessing at our future opportunity cost. Warren is guessing that he’ll have the opportunity to put capital out at high rates of return, so he’s not willing to put it out at less than 10% now. But if we knew interest rates would stay at 1%, we’d change. Our hurdles reflect our estimate of future opportunity costs.”...

HT: Value Investing World

1,111 Carat Diamond Found In Botswana

From Motherboard:
The final resting place for a diamond the size of your fist is not where you’d expect. 
At a whopping 1,111 carats, the largest diamond discovered in over a century was found in Botswana this week. The rock measures 65mm x 56mm x 40mm, about the size of a tennis ball. 
The stone was found in Karowe mine, which is 300 miles north of the country’s capital, Gaborone. Two other large diamonds, 813 carats and 374 carats each, were found in the same mine. The findings added $150 million to the value of the company that owns the mine this week, Lucara Diamond. 
"The significance of the recovery of a gem quality stone larger than 1,000 carats, the largest for more than a century... cannot be overstated," William Lamb, the CEO of Lucara, said in a statement. 
Already, administrators are deciding on what to do next with the massive diamond. Lucara announced that the rock was too big to fit inside their in-house scanner, so first thing’s first: it’s being sent for analysis to Antwerp, Belgium, home of a world-famous diamond district and one of the most popular places for diamond trading. 
Normally when massive diamonds like this are found, they don’t stay whole for long. As diamonds are the hardest substance on Earth, only a diamond can cut another diamond. The rock will likely be cut using another rock, as well as a fine saw coated in diamond dust, and shaped into smaller (though relatively still enormous) diamonds, and those will be sold individually....MORE

Nomura and Morgan Stanley on Dollar/Euro Parity

From Barron's Asia Stocks to Watch, Nov. 18:

Can Euro Hit Parity With The U.S. Dollar?
The U.S. dollar pared back gains in Asian trading after reaching a 7-month high against the Euro as the latest minutes from the Federal Reserve showed a strong intent to raise U.S. rates next month.

The euro rose 0.4% to trade at 1.07 recently. Other currencies gained too. The New Zealand dollar jumped 0.9%, the Australian dollar gained 0.7%, the Korean won gained 0.8%, the new Taiwan dollars rose 0.7% and the Malaysian ringgit jumped 1.2%.

Can the U.S. dollar sustain its gains? Historically, the dollar tends to rally heading into the Fed’s tightening cycle, followed by mixed performance afterwards.

Morgan Stanley thinks so:

The more challenging global environment is likely to leave the USD supported even once the Fed hiking cycle is under way. The impact of a higher USD and rising US rates on a fragile global economy, especially EM and Asia in particular, is set to provide the USD with continued support, we believe. The latest TIC data show that official holders have been sellers of US Treasuries for September. The TIC data show that China and Japan have also been net selling US Treasuries. This would seem consistent with the previously reported reduction in FX reserves in Asia and China in particular. The TIC reporting that China’s holdings of US Treasuries are now at a 7-month low. We view these reduction in FX reserves as a sign of private investor demand for USD, and hence a USD positive factor.
For Morgan Stanley’s view on the euro, check out this Bloomberg video.

Meanwhile, Nomura Securities updated its euro/usd forecast, now seeing euro parity in 6-9 months:

In early 2015, we were reluctant to extrapolate a strong EUR depreciation trend too far, and we have never previously embedded parity in our forecast path for EURUSD. However, we now judge that the likelihood of EURUSD hitting parity is high on a 6-9 month horizon....MORE
1.0623 down 0.0025.

How Special Is The Financial Times? (FT @ NYT)

From the New York Times, Nov. 22:

Pearson’s Big Paydays Defy the Odds Against Print Media
It has been tough sledding for print media. More than 150 newspapers have closed or converted to digital-only offerings in the last two years. Recently the magazine giants Condé Nast and Time Inc. have both cut employees and closed magazines.

What, then, to make of the recent sales of The Financial Times and The Economist for sky-high prices?

In July, to sharpen its focus on textbook publishing and testing, the British media company Pearson agreed to sell The Financial Times to Nikkei, an employee-owned Japanese publisher, for about 855 million British pounds, or about $1.3 billion, in cash. Pearson had owned The Financial Times for 58 years. Then, in August, Pearson sold its 50 percent stake in the Economist Group, publisher of The Economist, for £469 million, or about $715 million, to the Economist Group itself and to Exor S.p.A., the investment arm of Italy’s powerful Agnelli family.

Nikkei paid $1.3 billion for The Financial Times newspaper, which has combined paid print and digital circulation of 690,000, according to the company.Nikkei to Buy Financial Times From Pearson for $1.3 BillionJULY 23, 2015

The transactions turned heads, not only in media circles, but also on Wall Street. Nikkei paid 44 times The Financial Times’s operating profit. Exor paid 15 times the Economist Group’s operating profit. By contrast, Gannett, owner of USA Today and the largest public newspaper publisher, trades at about five times trailing cash flow, as does McClatchy, another large newspaper group. 
Both buyers are exultant. In an interview, John Elkann, Exor’s 39-year-old chairman, said that he started reading The Economist as a teenager. Over the last five years, he said, Exor’s sliver of equity, which increased to 43.4 percent in the deal, has given him insight into the power of the brand and its annual operating profit of about £65 million.

“If you have a distinct journalistic offer, which is independent; if you have a readership, which is growing in the world because more people want to be informed and speak and read English; and if you have technology that can help you reach much more of them than you could in the past, the combination of that, if well executed, is pretty powerful,” Mr. Elkann said of The Economist.

For his part, Tsuneo Kita, the Nikkei chairman, said in an email that for three years, he had wanted a partnership with The Financial Times for access to an important English-language business publication. Buying The Financial Times also gave Nikkei a way to diversify its aging 2.7-million subscriber base. In an auction conducted by Gregory Lee, a media banker at Evercore, Nikkei not only bested the German media company Axel Springer, it also outbid buyers like Bloomberg L.P. and Thomson Reuters, as well as private equity firms and assorted billionaires.

Mr. Kita wants to build the world’s premier business media company. “It is precisely because there is a flood of information every day that there is demand for trustworthy, accurate and insightful reporting,” he explained. He says the news business is in a period of “momentous change” and thinks both Nikkei and The Financial Times can thrive by keeping their independence, while learning from each other. “English is the premier business language of today, and The FT has a 127-year history of excellent reporting in this language,” he wrote. Nikkei is 139 years old.

At these prices, though, there is no guarantee that either buyer will make money on its investment. The newspaper business could be in the process of either a long-awaited turnaround or simply another downtick. Nikkei is borrowing the money for The Financial Times from a consortium of Japanese banks, albeit at historically low interest rates.
Despite these risks, The Financial Times’s successful auction was fueled by the combination of its brand and its success in its digital business, Mr. Lee, of Evercore, said. In the last decade, The Financial Times’s digital subscribers have increased to about 535,000 from 76,000; a majority of its about £300 million in revenue comes from subscribers, not advertisers.

John Ridding, chief executive of The Financial Times, said in an interview that the newspaper’s gamble in charging a high price for premium content, both in print and online, had paid off. And neither he nor his colleagues wanted The Financial Times to become some billionaire’s toy — it had to continue to be a relevant media property. “Some people thought that this was a trophy buy,” he said. “I think the answer to that is firmly no.”

In the end, Nikkei wanted The Financial Times more than Axel did, offering about £90 million more, according to people briefed on the deal. “They would have been prepared to go even higher,” Lionel Barber, editor of The Financial Times, said in an interview....MORE

Saudi Statement Offers Another Opportunity To Short Oil

Today's action via FinViz:
$41.50, last.
And from ZeroHedge:

Oil Tumbles Back Into Red As Saudi "Whatever It Takes" Jawboning Is Not Enough
Just 2 hours after news broke of Saudi officials discussing the need to do "whatever it takes" to stabilize the oil market - sending crude soaring - half the gains are gone. With the algos tagging Friday's highs, WTI Crude has tumbled back into the red from Friday's close as traders want action not words to solve the massive global oil glut...

U.S. Farmland Price Decline Now At Two Years and Counting

From Agrimoney:
US farmland prices extend decline to two full years
Farmland prices in major US agricultural states extended their decline to two full years, undermined by weak crop values which have kept the farm equipment sector in the mire for even longer.
A farmland price index formulated by Creighton University, on states from North Dakota to Colorado, came in at 34.8 points for November – up from the figure of 31.0 for last month, but remaining well below the 50.0 level which indicates a neutral market.

The decline represented "the 24th straight month the index has moved below growth neutral", said Ernie Goss, the Creighton economics professor in charge of the survey, underlining the depressant effect to agriculture from weaker crop values. 
"The strengthening US dollar and global economic weakness have pushed farm commodity prices down by 14.1% over the past 12 months."

'Strongly positive'The comments come the week after data from the Federal Reserve, the US central bank, showed a stabilisation in land values in major Corn Belt and central Plains states over the summer, although lenders surveyed for the report forecast a further decline in values ahead.

And they follow too an unusually large land purchase in Illinois announced last week by Farmland Partners, which purchased 22,300 acres for a price of $197m, equivalent to some $8,800 per acre, saying that it believed the sluggish market would prove short-term....

Gold Miners: Here Comes Your Nineteenth Market Meltdown (GDX; GDXJ)

December gold $1071.60, down $4.70.
The ETF for the senior miners, the GDX closed at $13.40 on Friday, down 4% on the day and flirting with the multi-year low printed on September 11 at $12.62. The juniors, proxied by the GDXJ closed at $1.79 down a lower percentage but weak nonetheless.

From The Daily Gold:

Bracing for Another Breakdown in Gold Miners
The bear market in the gold miners has been one for the record books but it is not over yet. Last week we noted that precious metals were on the cusp of making new lows while the US$ index was very close to another key breakout. This scenario remains well in play and would certainly affect the gold mining sector, which over the past two weeks failed to rebound or build on any strength. 
Below is a daily candle chart that shows GDXJ (large juniors) and GDX (largest miners). Before Friday both markets had essentially traded nowhere or sideways over the past 10 days. That could be enough time to “work off” the oversold condition that developed after the miners declined 16% and 18% over the previous eight days. Friday’s sharp decline reduced the miners chances of testing the 50-day moving average and could be the start of the next leg lower. Any strength next week could be capped near $19.50 in GDXJ and $14.00 in GDX. A daily close below $18.00 in GDXJ and $13.00 in GDX could quickly lead to lower levels. 
GDX and GDXJ have formed small hammers on the weekly candle charts but volume and size (of the reversal) are lacking. The miners appear to be biding time before an inevitable break to new lows. Unless they can close above the highs of this week or form a huge reversal next week, the prognosis for the weeks ahead remains bearish. Finally, note that previous declines lasted nine to ten weeks. While this decline may not last as long, it could continue for several more weeks as miners are not yet extremely oversold on a weekly basis....MORE 

"Trends in oil production"

From Econbrowser:
World field production of crude oil increased 2.9 million barrels a day in the 12 months ended last July. That compares with a 3.6 mb/d increase over the entire nine years from Jan 2005 to Dec 2013.
World field production of crude oil in thousands of barrels per day, Jan 1973 to July 2015.  Data source: Monthly Energy Review, Table 11.1b.
The biggest single factor is Iraq, where production is up almost 1.1 mb/d over the last year. Although ISIS has managed to bring cruelty to much of the rest of the world, so far they have not disrupted Iraqi oil production.
Iraq field production of crude oil in thousands of barrels per day, Jan 1973 to July 2015.  Data source: Monthly Energy Review, Table 11.1a.
The second biggest factor in the 2.9 mb/d gain was the United States, where production increased 0.6 mb/d July 2014 to July 2015, thanks to the tremendous success of shale oil, or production based on horizontal fracturing of tight geologic formations.
U.S. field production of crude oil in thousands of barrels per day, Jan 1973 to July 2015.  Data source: Monthly Energy Review, Table 11.1b.
...MORE (looking for the turn)

Sunday, November 22, 2015

"Goldman eyes $20 oil as glut overwhelms storage sites"

In case you missed it.
This is actually a reiteration of a call Goldman made in September, which idea was shot down by a bunch of idiots demurrers .
Storage and the perception of storage are important, see link below.
December futures have dropped off the board, the new front-month January's were last at $41.46 down 26 cents. With October 2016 contracts at $48.02 there is more than enough room for a storage contango trade.

From Ambrose Evans Pritchard at the Telegraph:
“The world is floating in oil. The numbers we are facing now are dreadful," said David Hufton from PVM Group 

The world is running out of storage facilities for surging supplies of oil and may soon exhaust tanker space offshore, raising the chances of a violent plunge in crude prices over coming weeks, experts have warned.
Goldman Sachs told clients that the increasing glut of oil on the global market has combined with mild weather from a freak El Nino this winter. The twin-effect could send prices plummeting to $20 a barrel, the so-called ‘cash cost’ that forces drillers to abandon production. “Risks of a sharp leg lower remain elevated,” it said.
Oil has fallen from $110 a barrel early last year and is hovering near $40 for US crude, and $44 for Brent in Europe.
The US investment bank said the overall glut in the commodity markets may take another twelve months to clear. It cited ‘red flag’ signals on the Shanghai Future Exchange over recent days. Copper contracts point to “imminent weakening” in China’s ‘old economy’ of heavy industry and construction, it said.
The warnings came as OPEC producers and Russian companies fight a cut-throat battle for market share in Europe and Asia. Saudi Arabia is shipping crude to Poland and Sweden for the first time, poaching new customers in the Kremlin’s traditional backyard.

Iraq is selling its low grade ‘Basra heavy’ crude on global markets for as little as $30 a barrel as the country runs out of operating cash and is forced to cut funding for anti-ISIS militias. Iraq is seeking a large rescue loan from the International Monetary Fund. “The drop in oil prices is a difficult test for us,” said premier Haider al-Abadi.

It is estimated that at least 100m barrels are now being stored on tankers offshore, waiting for better prices. A queue of 39 vessels carrying 28m barrels is laid up outside the Texas port of Galveston, while the Iranians have a further 30m barrels offshore ready to sell as soon as sanctions are lifted.
“The world is floating in oil, and commercial stocks on land are at a record high,” said David Hufton, head of oil brokers PVM Group. “The numbers we are facing now are dreadful. Stocks have been building continuously for two years. This is unprecedented.”

“What has saved us so far is that China has been buying 200,000 to 300,000 barrels a day (b/d) for their strategic reserve,” he said.
It is unclear exactly how much more space China may have. The Chinese authorities certainly want to keep building stocks – and do so at bargain prices - since reserves cover just 50 days demand, far short of the 90-day minimum recommended by the International Energy Agency. But the new storage depots in Gansu and Xinjiang will not be ready until the end of the year, at the earliest.

Data from the US Energy Department shows that America’s storage sites are 70pc full, in theory leaving room for another 150m barrels. But this is already tight enough to create regional bottlenecks. It will not be sufficient if OPEC continues to flood the global market in a bid to drive out rivals. Excess supply is running near 2m b/d....MORE
Back on August 23 we posted "Oil Price Decline May Be Due For a (Brief) Pause".
We got lucky with the timing:
A twofer following Friday's $39.86 WTI print.
First though, some background. Back in January we and FT Alphaville's Izabella Kaminska posted on the opportunities presenting themselves in the cash-and-carry corner of the oil trade:

As We Search For A Bottom In Crude: Floating Oil Storage--Do the Math
That post pointed out that the six month contango was $6.50, more than enough to make the trade work.
We aren't there yet but at $4.00 from the October futures to the April vintage it definitely has some of the bigger houses and maybe even some of the national oil companies firing up their slide rules.
In late May with WTI at $56.74 down 77 cents we posted "The tanker market is sending a big warning to oil bulls". Early but not wrong. Here's how the action turned out:

We expect lower prices this autumn but for now $40.29 seems like a reasonable place to stop falling or maybe even bounce a bit....