Thursday, April 24, 2014

Archaeology: "Previously Unknown Warhol Works Discovered on Floppy Disks from 1985"

From The Frank-Ratchye STUDIO for Creative Inquiry at Carnegie Mellon: 

Collaborative Team Rescues Early Digital Art through “Forensic Retrocomputing”
A multi-institutional team of new-media artists, computer experts, and museum professionals have discovered a dozen previously unknown experiments by Andy Warhol (BFA, 1949) on aging floppy disks from 1985.

The purely digital images, “trapped” for nearly 30 years on Amiga® floppy disks stored in the archives collection of The Andy Warhol Museum (AWM), were discovered and extracted by members of the Carnegie Mellon University (CMU) Computer Club, with assistance from the AWM’s staff, CMU’s Frank-Ratchye STUDIO for Creative Inquiry (FRSCI), the Hillman Photography Initiative at the Carnegie Museum of Art (CMOA), and New York based artist Cory Arcangel.
Warhol’s Amiga experiments were the products of a commission by Commodore International to demonstrate the graphic arts capabilities of the Amiga 1000 personal computer. Created by Warhol on prototype Amiga hardware in his unmistakable visual style, the recovered images reveal an early exploration of the visual potential of software imaging tools, and show new ways in which the preeminent American artist of the 20th century was years ahead of his time.Andy2, 1985. Andy Warhol (American, 1928-1987). Digital image. © 2014 The Andy Warhol Foundation for the Visual Arts, Inc. / Artists Rights Society (ARS), New York.
Campbell's, 1985 by Andy Warhol (American, 1928-1987). Digital image, from disk 1998.3.2129.3.22. The Andy Warhol Museum, Pittsburgh; Founding Collection, Contribution The Andy Warhol Foundation for the Visual Arts, Inc. © 2014 The Andy Warhol Foundation for the Visual Arts, Inc. / Artists Rights Society (ARS), New York
The impetus for the investigation came when Arcangel, a self-described “Warhol fanatic and lifelong computer nerd,” learned about Warhol’s Amiga experiments from the YouTube video of the 1985 Commodore Amiga product launch. Acting on a hunch, and with the support of CMOA curator Tina Kukielski, Arcangel approached the AWM in December 2011 regarding the possibility of restoring the Amiga hardware in the museum’s possession, and cataloging any files on its associated diskettes. In April 2012, he contacted Golan Levin, a CMU art professor and director of the FRSCI, a laboratory that supports “atypical, anti-disciplinary and inter-institutional” arts research. Offering a grant to support the investigation, Levin connected Cory with the CMU Computer Club, a student organization that had gained renown for its expertise in “retrocomputing,” or the restoration of vintage computers.

CMU Computer Club members determined that even reading the data from the diskettes entailed significant risk to the contents, and would require unusual tools and methodologies. By February 2013, in collaboration with collections manager Amber Morgan and other AWM personnel, the Club had completed a plan for handling the delicate disk media, and gathered at The Andy Warhol Museum to see if any data could be extracted. The Computer Club set up a cart of exotic gear, while a video crew from the Hillman Photography Initiative, under the direction of Kukielski, followed their progress....MORE

Urals Mint: 1 Kilogram Putin Coin to Commemorate Crimea Annexation

From the BBC:
Special edition coin bearing an image of Vladimir Putin and the Crimean Peninsula  
The company refers to the new coin as "1kg of nobility"

Commemorative coins bearing an image of Russian President Vladimir Putin are being minted at a Russian factory to mark the Kremlin's takeover of Crimea, it appears.

Putin's face is on one side of the 1kg (2.2lb) coin while the other shows a map of the Crimean Peninsula, Moscow daily Komsomolskaya Pravda reports. Factory director Vladimir Vasyuhin explains that by bringing the Crimean peninsula "back home", Putin had "demonstrated the qualities of a wise strategist and politician". In March, Russia formally took over control of Crimea from Ukraine, despite international sanctions.

The limited edition of 500 silver coins has been called The Gatherer of Russian Lands - a phrase traditionally associated with Ivan III - better known as Ivan the Great - who significantly expanded Russia's territories during his rule. The coins haven't been priced yet - some of them may be sold, although they won't be used as currency - and the factory says it is planning to present some of them to the Russian leadership.

This isn't the first time Putin has been featured on a coin, Russian website says. Ironically, in 2006 Ukraine launched a coin featuring the Russian president, marking 10 years of its national currency, the hryvnia. The coin was encrusted with precious stones and cost $500 (£300)....MORE

Following the EIA Storage Report: Natural Gas Futures Down, Natural Gas Producer's Stocks Up (FCG)

From the EIA:
Weekly Natural Gas Storage Report
for week ending April 18, 2014   |   Released: April 24, 2014 at 10:30 a.m.   |   Next Release: May 1, 2014
Working gas in storage was 899 Bcf as of Friday, April 18, 2014, according to EIA estimates. This represents a net increase of 49 Bcf from the previous week. Stocks were 831 Bcf less than last year at this time and 1,008 Bcf below the 5-year average of 1,907 Bcf. In the East Region, stocks were 470 Bcf below the 5-year average following net injections of 17 Bcf. Stocks in the Producing Region were 412 Bcf below the 5-year average of 805 Bcf after a net injection of 22 Bcf. Stocks in the West Region were 127 Bcf below the 5-year average after a net addition of 10 Bcf. At 899 Bcf, total working gas is below the 5-year historical range.
Working Gas in Underground Storage Compared with 5-Year Range Note: The shaded area indicates the range between the historical minimum and maximum values for the weekly series from 2009 through 2013....MORE
The front futures are down 2.8 cents at $4.7020.
Meanwhile the equities continue to romp and play:
First Trust ISE-Revere Natural Gas Index ETF $22.82 Up 0.22 (+0.97%)
Chart forFirst Trust ISE-Revere Natural Gas Idx (FCG)

See also:
Why We Suggested Buying Natural Gas Equities (FCG)

Société Générale's Albert Edwards Is Worried

Yes, I know. Fire hot, water wet, Albert bearish, see also: tautonym.
From FT Alphaville:

Roar of the permabear
Albert Edwards, the SocGen strategist who first began advocating a big holding of long government bonds seventeen years ago, would like to bring to your attention news overlooked during the Easter break by giddy investors.
China’s Q1 GDP was highly significant, not for the headline slowdown in GDP growth to 7.4%, but because economy-wide inflation slumped further towards outright deflation. The continuing deterioration in Chinese economic data significantly increases the odds of global deflation being unleashed via an unavoidable Chinese devaluation. No wonder the markets prefer to look elsewhere!
More on that momentarily, but Albert would like to clarify his view on long bonds, that 17 year overweight.
I believe that on a 3-5 year view they will prove to be a toxic investment. I believe on that timescale QE will result in a rapid rise in inflation, with Japan probably leading the way. But it is not the QE to date that will cause an uncontrolled break-out of inflation, but what is to come in the years ahead (and incidentally, we fully acknowledge that QE has already produced rampant inflation, but in the financial markets rather than at the CPI level).
As he acknowledges, there’s no sign of price inflation yet and the hyper-inflation crowd have been dead wrong for five years now. Indeed, we are not there yet. What Albert expects is that over the next 6 to 18 months the global economy will slide into deflation, unable to tolerate the merest of monetary tightening and accompanied by financial bubbles bursting....MORE
All in all I'd have to say he sounds better than he did in February's "Société Générale's Albert Edwards Descends Into A Nightmare World of Dream Demons and Market Depravity" .

See also:
Jan. 15
More on The Mind of Société Générale's Albert Edwards
Jan. 14
"Live: The Albert Edwards Experience!"

"...The Sharing Economy’s Dirty Little Secret"

From the Wall Street Journal's The Accelerators blog:
Want some real talk? The sharing economy isn’t actually about sharing. The buyer doesn’t care if they’re sharing, renting, bartering or buying — so long as they get what they want at a good price. And the seller just wants to make some cash, preferably without working too hard.

A Few Case Studies
Don’t believe me? Let’s look at a few of the leading companies in the space formerly known as the sharing economy. Airbnb? Okay, they let you share (or rent) your apartment — fair enough. Lyft? That one’s harder. You’re renting your car, but, more than that, you’re selling your time. And Uber, Lyft’s archrival, is simply a better interface to limousine and car services — a massive industry that employs hundreds of thousands of drivers and has existed for decades.

It goes on from there. Looking through AngelList’s top 20 collaborative consumption startups (“collaborative consumption” is a synonym for the sharing economy), it’s clear that some of the early breakouts have a relationship to sharing that’s tenuous at best. Homejoy is a better interface to housecleaners. Rent the Runway is an online dress rental service. Gazelle is a convenient way to sell your old electronics. My company, Twice, is a marketplace for pre-owned fashion.

What These Startups Have in Common
Despite my semantic grumbling, however, some important commonalities truly do exist. First, in all cases, the allure for the seller (if there’s a seller) is easy access to cash. Sometimes it’s through an under-utilized asset, for example selling the clothes you no longer wear on Twice. Other times it’s through convenient scheduling and flexible hours, for example cleaning apartments on Homejoy. Second, the allure for the buyer (if there’s a buyer) is more flexible access to products and services. This, in turn, often reduces prices, since buyers can pay for only what they need. For example, ten years ago you could have employed a chauffeur to drive you around, but hardly anyone could afford it. Uber lets buyers access that convenience on-demand, so you only pay for what you use....MORE
Psst, it's not much of a secret.

Dear Airbnb: Charging Rent to Someone Is Not "The Sharing" Economy
I usually side with the upstart against the incumbent but this guy sounds seriously manipulative.
The Economist on The Rise of the Sharing Economy
On Airbnb's $10 billion Valuation and the 'Sharing' Economy in General
"Airbnb Is Worth $10 Billion Because The Sharing Economy Is a Farce"

No, not much of a secret at all.

"'Cool Kid' Tech Stocks Are a Lightning Rod"

From Barron's Read This, Spike That:

The news that David Einhorn is shorting a basket of "bubble stocks" has triggered debate among pundits.
Professional investors and the financial media alike tend to closely read and discuss the quarterly musings of hedge-fund manager David Einhorn. 

But Einhorn's latest shareholder letter may be getting more attention than most. That's because the stockpicker who famously shorted Lehman Brothers well ahead of its September 2008 demise has written that he has shorted a basket of "bubble" stocks. 

In his letter released Tuesday, Einhorn, the manager of Greenlight Capital, didn't name the companies he's shorting. And I wouldn't venture a guess at what they might be. (He might have some interesting off-the-beaten-path mid- or small-cap names on his short list, for all I know.) And it's possible that all the names aren't purely in the tech space. However, in recent months, certain glamour tech stocks including Netflix (ticker: NFLX), Facebook (FB) and Twitter (TWTR) have aroused the suspicions of many investors because of heady climbs followed by big falls, followed by modest comebacks in recent days. 

But even though Einhorn isn't naming names, his brief reference to a category of "cool kid" companies that are trading ahead of their true worth has become rich fodder for financial-media pundits. Tech stocks, after all, still fire the imaginations of writers like few other sectors, even though the industry is a shadow of its 1990s self.
What's interesting is that not all the pundits agree that there's a bubble in tech right now, given that many of these stocks fell by 20% or more in the past four or five weeks before a recent modest rebound. 

Jim Cramer may lead the list of critics of the bubble theory. In a piece for his Website, The Street, Cramer asks rather rhetorically: "How is it that we now bank with managers who tell us there is a tech bubble brewing without taking into account that the bubble has been bursting for a month now?"...MUCH MORE
We'll be back with some thoughts on April 12th's "Barron's Cover: Equities-The Highfliers Are Still Too High" in who's intro we referenced our "Cool Kids" trade, all but IBB are in the black, a better situation than 12 days ago:
It's been a week since Friday Apr. 4's "Mind the Gaps: A Lot Of Momentum Stocks A Starting to Look Interesting (NFLX; TWTR; XBI; FB; P)", the results are not going to earn anyone a bonus.
The initial group:
NFLX  337.38 -17.31
TWTR   42.96 -1.09
XBI     132.28 -6.90
FB         57.18 -2.31
P           27.82 -2.03
And a couple of "special situations" I started talking about on the following Monday:
TSLA  207.52
FSLR    68.00
Special because, in Tesla's case the $203.00 support seemed really important and in First Solar's case because, unlike most of the rest of the momo's, the stock had actually gained +25% over the prior month.

Here's last week's performance via Yahoo Finance:
Chart forNetflix, Inc. (NFLX)
Only one, Facebook, managed to turn a profit and even FSLR cracked and went into the red.
Not too impressive Mr. analyst guy.
Tesla dipped five bucks under support on Friday before rallying to close at $203.78 and remains the most interesting of the bunch. The rate of descent in the biotechs (XBI and IBB) has slowed but they are still dangerous, tradable for the nimble only.

Also, I have to repeat, we are still in a bull market, although you would be excused for believing otherwise based on the performance of the above group of misfits.

Wednesday, April 23, 2014

Given Piketty,Why Do Great Fortunes Disappear

It used to be war that did in the big piles of familial loot. The repeal of primogeniture and the introduction of death duties has also had a leveling effect.
Still though, there's nothing like having your land possessed (or repo'd) by force of arms to spread the wealth around.
From Bloomberg:

If Capital Grows This Fast, How Come Fortunes Disappear?
18th Century Aristocracy
Michel Barthelemy Olivier, "Thé a l'Anglaise" via Getty Images
The great aristocratic fortunes of the 21st century rival those of Louis XV. And beheading is rarer.
Just how fast do fortunes grow? Andrew Carnegie started from essentially nothing to become the second-richest man in the United States by the time he’d reached the modern retirement age of 65. John Pierpont Morgan got to the top spot even faster, though he had the advantage of being born into wealth. In our own century, Bill Gates beat them both, becoming the richest man in the world before the age of 40.

If the descendants of Carnegie and Morgan and Gates (who has promised to give most of his wealth away) and Carlos Slim bank their fortunes and let it accumulate over the generations, just how much of the world will they own?

The question comes up now because of one book that has seized the attention of the world of economists and those who interpret them: Thomas Piketty’s “Capital in the 21st Century.” The grand summation of the worldwide problem of inequality has gotten a reception that the New York Times’s Jennifer Schuessler describes as “rapturous.”

Together with his frequent collaborator Emmanuel Saez, Piketty has probably done as much as anyone to map wealth and income in the world today. So the encomia are understandable, but as Bloomberg View’s Clive Crook argues, many folks have seem to overlook the leaps from Piketty’s careful scholarship to his big claims. Some of those claims, like Piketty’s accounting of how fast capital expands, seem downright strange.

Which brings us back to that question about how fast fortunes grow. The central claim of Piketty’s book is that the period of diminishing inequality that we saw in the 20th century is a historical aberration, and we are entering a period in which capitalism returns to its natural state of affairs: an increasing concentration of wealth in fewer and fewer hands. That contention is based on a formula that’s fast becoming famous: When the rate of return on capital is greater than the overall growth of the economy — when r>g, in Piketty’s formula — wealth becomes progressively more concentrated.
Piketty believes this was the the case through most of history. To illustrate this, he starts off the book with a long, erudite, and charming discussion of Honoré de Balzac and Jane Austen, demonstrating how for many years it was an accepted rule of thumb that owners of land or bonds would see their capital appreciate at a rate of about 5 percent a year.

For Piketty, that 5 percent rate of growth routinely cited by Balzac and Austen is quite close to the mark; his own calculations yield a number somewhere in the 4 or 5 percent range for the period in which they worked. And that, unfortunately, is a lot faster than most economies grow. Some of that capital, of course, gets spent to maintain the lifestyles of the rentiers. But the rest gets reinvested. If the holders of capital manage to reinvest, say, three-fifths of their money (a number that Piketty takes as reasonable assumption), they will see their fortunes grow 3 percent a year. That’s much faster than economies expanded through most of history. Actually, it’s faster than just about any economy expands except during short and anomalous bursts (like China today or Europe in the period 1950-1980) — and faster than U.S. and European economies are likely to expand in the next century.

The 5 percent returns on capital that Piketty sees as the historic norm have to come from somewhere. And if the income of the 1% (or really 0.1%) is not coming from economic growth, it has to be coming out of squeezing the share of the 99%. That’s a neat and powerful argument you don’t need to be a professional economist to understand. It hinges, though, on that rate of return on capital, a number that frankly seems hard to support.

On Balzac, let’s defer to Thomas Piketty. But it’s not totally clear that on this subject French novels are more authoritative than Russian plays, in which the position of the rentier is more precarious. Not every landowner could sit back and collect a 5 percent risk-free return on the value of an estate; if that was the case, Anton Chekhov’s Anya and Varya would still be sitting pretty in their cherry orchard....MORE
HT: The Big Picture

New York Fed: "Introduction to the Floating-Rate Note Treasury Security"

From the Federal Reserve Bank of New York's Liberty Street Economics blog:
The U.S. Department of the Treasury (Treasury) auctioned its first floating-rate note (FRN) on January 29, 2014. With this auction, Treasury introduced the first new marketable debt instrument since Treasury inflation-protected securities (TIPS) in 1997. The new two-year FRN is a fixed-principal security with quarterly interest payments and interest rates indexed to the thirteen-week Treasury bill. In this post, we will discuss Treasury’s reasons for adopting an FRN as well as the existing FRN markets, expected FRN market participants, and results of the first FRN Treasury security auction.

Why Adopt an FRN?
Treasury generally seeks to minimize the long-run cost of issuing government debt. By adding a new product to the existing offering of marketable debt securities, Treasury expects that the investor base will expand, which will serve to lower Treasury’s borrowing cost. Recently, Treasury has also been extending the maturity of its debt portfolio as part of its strategy to control the overall cost of financing in a way that remains resilient during periods of market volatility and to lower the risk of a failed auction. ...MUCH MORE

"World Cup Mind-Control Demo Faces Deadlines, Critics"

In previous posts I've said we're probably watching, in real time, a Nobel Prize being won but there are criticisms of what Dr. Dr. Nicolelis is planning.
From MIT's Technology Review, April 15, 2014:
A Brazilian neuroscientist says brain-controlled robotics will let the paralyzed walk again. 

In less than 60 days, Brazil will begin hosting soccer’s 2014 World Cup, even though workers are still hurrying to pour concrete at three unfinished stadiums. At a laboratory in São Paulo, a Duke University neuroscientist is in his own race with the World Cup clock. He is rushing to finish work on a mind-controlled exoskeleton that he says a paralyzed Brazilian volunteer will don, navigate across a soccer pitch using his or her thoughts, and use to make the ceremonial opening kick of the tournament on June 12.

legged robotThe project, called Walk Again, is led by Miguel Nicolelis, a 53-year-old native of Brazil and one of the biggest names in neuroscience. If it goes as planned, the kick will be a highly public display of research into brain-machine interfaces, a technology that aims to help paralyzed people control machines with their thoughts and restore their ability to get around.

“It’s going to be like putting a man on the moon—it’s conquering a level of audacity and innovation that the people outside Brazil aren’t used to associating with Brazil,” Nicolelis has told audiences. The kick, he has said, “will inaugurate a new era of neuroscience, [that of] neuroengineering.”

But the Walk Again project is drawing doubters. Saying the demonstration is as much publicity stunt as science, they question whether it will illustrate any real degree of thought control. That’s because it relies on a fairly old, imprecise brain-recording technology called EEG, or electroencephalography.

At least three other research groups have recently published reports of EEG-controlled exoskeletons. Yet so far, none have managed to do much more than send a start or stop signal. They let the robotic harness do the rest of the work on a preset trajectory, with plenty of outside assistance in balancing.

That suggests that the level of brain control could be disappointingly minimal, even if it’s presented as a breakthrough on TV. “What would happen if a gust of wind moved the ball by three centimeters right before the demo began?” asks Andrew Schwartz, a neuroprosthetics researcher at the University of Pittsburgh. “Everything you’ll see in the demo will be fancy robotics, not brain control, and it will probably all be preprogrammed.”...MORE
Our April d1, 2014 post "Shortly before 5pm local time on 12 June 2014, a young paraplegic Brazilian will stand up from a wheelchair, walk over to midfield, and take the first kick of the 2014 World Cup" has links to earlier posts and begins:
Long time readers know Dr., Dr.* Nicolelis is a bit of a showman.
And probably going to win the Medicine or Physiology Nobel....
*M.D., PhD, hence the double Doc. 

Insurance: Risk of Asteroid Hitting Earth Higher than Thought

From Reuters
The chance of a city-killing asteroid striking Earth is higher than scientists previously believed, a non-profit group building an asteroid-hunting telescope said on Tuesday.

A global network that listens for nuclear weapons detonations detected 26 asteroids that exploded in Earth's atmosphere from 2000 to 2013, data collected by the Comprehensive Nuclear Test Ban Treaty Organization shows.

The explosions include the Feb. 15, 2013, impact over Chelyabinsk, Russia, which left more than 1,000 people injured by flying glass and debris.

"There is a popular misconception that asteroid impacts are extraordinarily rare ... that's incorrect," said former astronaut Ed Lu, who now heads the California-based B612 Foundation. 
The foundation on Tuesday released a video visualization of the asteroid strikes in an attempt to raise public awareness of the threat.

Asteroids as small as about 131 feet (40 meters) - less than half the size of an American football field - have the potential to level a city, Lu told reporters on a conference call

"Picture a large apartment building - moving at Mach 50," Lu said.

Mach 50 is 50 times the speed of sound, or roughly 38,000 mph (61,250 kph)....MORE

If Farm Investing Conference Agenda Is Any Indication, Marijuana Prices Are Going to Zero

From MoneyBeat:

Farming Conference Goes to Pot 
A popular farming conference is bringing pot to the table.

The Global AgInvesting series is one of the world’s most widely-attended and closely watched agricultural conferences, featuring presentations from heavyweights like Brookfield Asset Management and Macquarie. And this year, for the first time, a panel will feature a marijuana retailer.

Next Wednesday, sandwiched between fund managers and agricultural consultants, Jordan Lewis, chief executive of Silverpeak Apothecary, a Colorado marijuana purveyor based in Aspen, Colo., is scheduled to speak on a panel at the conference at the Waldorf Astoria hotel in New York.

Mr. Lewis’s company, along with those of his fellow panelists, including an executive of a unit of St. Paul, Minn.-butter maker Land O’Lakes, are sponsors of the event. But the organizer says it was an easy call to include him, given the budding interest in the marijuana business.

“We could have said ‘no,’” said Philippe de Lapérouse, chair of the conference series and managing director of agricultural consulting firm HighQuest Partners....MORE
A lot of farmland top-tick-Tommies are looking for something to save their sorry behinds.
Bring on the drones:
Criminals ‘using unmanned drones and infrared cameras to find illegal cannabis farms’ – and then steal from the growers

Each $4,000 of Additional Mid-career Income Correlates With an Extra Year of Life After 55

From The Atlantic:

The Rich Live Longer: So How Much Money 'Buys' 1 More Year of Life?
 Climbing America's income ladder today is truly a game of life and delayed death—and thousands of dollars are separating the rungs. 

Richer people live longer lives.

It's true for both men and women. It's true at virtually every income level. And it was the backbone of one of the most striking charts I've seen this year in the Wall Street Journal, based on research by Brookings scholar Barry Bosworth.
And it made me wonder: If more money "buys" more life, how much extra income buys one more year of living?

Yep, it's a cheeky question. Everybody knows that money doesn't literally buy life, or inoculate against disease, or prevent random car accidents. But if Bosworth's data showed that average lifespans grow with income, I wondered how much additional income was associated with exactly one more year of living after 55.

I contacted Brookings for the raw data, ran the numbers, and doubled-checked with Bosworth. For middle-class men now in their mid-60s and older, each $4,000 of extra mid-career income correlated with an extra year of life after 55. "You can’t say that making a certain amount of dollars guarantees more life,” Bosworth said. "What’s fine for you to say is that where the [per-earner] income goes up by about $4,000, that was generally associated with living another year."

This number might sound a little small to you: Is a $40,000 raise really associated with an extra decade of life? Well, hold on....MORE

Active Management Benefits Endowment Returns

With the same punchline as the Paratrooper/Jumpmaster joke: "A little".
From FT Alphaville:

Stock picking works! (sort of, maybe)
A white paper lands from Commonfund, a type of investment consultant and asset manager for US endowments. It asks the question: does active management benefit endowment returns?

Concerned people really would like to know. And the answer is a qualified maybe, in that Commonfund finds correlation between the amount of US stock holdings that an endowment chooses to actively manage, and the likelihood that the stock portfolio will outperform the market.

However to get there involves some fun with statistics. What Commonfund gets out of the way first is that it doesn’t have the data to answer the question definitively.
The evaluation of whether endowments’ active equity investments underperform, are not different from, or outperform their passive investments in U.S. markets requires knowing the returns earned and costs incurred by endowments pursuing both active and passive management strategies. This granular data is not readily available.
Fear not, instead the group can a broad sample of endowment managers about the realised cost, allocation and performance of their actual active and passive positions....MORE
Always keeping in mind that for an endowment the only quarter that should matter is the next quarter-century.

What Did QE Do For Us?

Two papers, remarkably similar conclusions.
First up, the Financial Times' Money Supply blog:

What did QE ever do for us?
More than five years after the start of the great QE experiment, agreement about what the asset buying scheme achieved is still thin on the ground. A new Bank of England paper from external MPC member Martin Weale released today tries to put a figure to how much QE boosted national output and inflation in the UK and the US. Its results are as follows:
“At the median, an asset purchase shock that results in an announcement worth 1% of nominal GDP, leads a rise of about .36% (.18%) of real GDP and .38% (.3%) in CPI in the US (UK). These findings are encouraging, because they suggest that asset purchases can be effective in stabilising output and prices”
Here is how it compares to previous studies:
As you can see the results are broadly in line with previous papers in the case of all variables, except for UK inflation....MORE
And from Real Time Economics:

Fed Bond-Buying Delivered ‘Significant’ Boost to U.S. Economy, IMF Researchers Say
How much of a punch did the Federal Reserve’s easy-money policies pack?

Former Fed Chairman Ben Bernanke famously quipped in his closing days that the problem with quantitative easing is that “it works in practice but it doesn’t work in theory.”

Not all central bankers and economists have agreed, spurring a debate over the effectiveness of the Fed’s policies. Part of the problem was that it was difficult to determine the impact of bond-buying on borrowing costs.

Some of the Fed’s own studies don’t find large gains from the central bank’s bond-buying programs. For example, San Francisco Fed researchers Vasco Curdia and Andrea Ferrero estimated the program that ran from late 2010 to early 2011 raised growth by just 0.13 percentage point. If accurate, all of the Fed’s bond programs together would have added less than a percentage point to economic output.

Others find more substantial effects. San Francisco Fed President John Williams in January estimated that $600 billion of Fed bond purchases lowered the yield on 10-year Treasuries by about 0.15 percentage point to 0.25 percentage point. That’s similar to the movement that would follow the Fed cutting short-term rates by 0.75 percentage point to a full percentage point – a relatively large rate cut, he said at the time.
In the paper published Friday, the duo backs Mr. Williams’s assessment....MORE

"Pseudo-Mathematics and Financial Charlatanism...."

From EurekAlert:

Pseudo-mathematics and financial charlatanism
Your financial advisor calls you up to suggest a new investment scheme. Drawing on 20 years of data, he has set his computer to work on this question: If you had invested according to this scheme in the past, which portfolio would have been the best? His computer assembled thousands of such simulated portfolios and calculated for each one an industry-standard measure of return on risk. Out of this gargantuan calculation, your advisor has chosen the optimal portfolio. After briefly reminding you of the oft-repeated slogan that "past performance is not an indicator of future results", the advisor enthusiastically recommends the portfolio, noting that it is based on sound mathematical methods. Should you invest?

The somewhat suprising answer is, probably not. Examining a huge number of sample past portfolios---known as "backtesting"---might seem like a good way to zero in on the best future portfolio. But if the number of portfolios in the backtest is so large as to be out of balance with the number of years of data in the backtest, the portfolios that look best are actually just those that target extremes in the dataset. When an investment strategy "overfits" a backtest in this way, the strategy is not capitalizing on any general financial structure but is simply highlighting vagaries in the data.

The perils of backtest overfitting are dissected in the article "Pseudo-Mathematics and Financial Charlatanism: The Effects of Backtest Overfitting on Out-of-Sample Performance", which will appear in the May 2014 issue of the NOTICES OF THE AMERICAN MATHEMATICAL SOCIETY. The authors are David H. Bailey, Jonathan M. Borwein, Marcos Lopez de Prado, and Qiji Jim Zhu.

"Recent computational advances allow investment managers to methodically search through thousands or even millions of potential options for a profitable investment strategy," the authors write. "In many instances, that search involves a pseudo-mathematical argument which is spuriously validated through a backtest."
Unfortunately, the overfitting of backtests is commonplace not only in the offerings of financial advisors but also in research papers in mathematical finance. One way to lessen the problems of backtest overfitting is to test how well the investment strategy performs on data outside of the original dataset on which the strategy is based; this is called "out-of-sample" testing. However, few investment companies and researchers do out-of-sample testing.

The design of an investment strategy usually starts with identifying a pattern that one believes will help to predict the future value of a financial variable. The next step is to construct a mathematical model of how that variable could change over time. The number of ways of configuring the model is enormous, and the aim is to identify the model configuration that maximizes the performance of the investment strategy. To do this, practitioners often backtest the model using historical data on the financial variable in question. They also rely on measures such as the "Sharpe ratio", which evaluates the performance of a strategy on the basis of a sample of past returns....MORE

HT: Ritholtz@Bloomberg

Previously on the Mountebank channel:
UPDATED--Are You a Recent Graduate Who Hasn't Found a Job? Consider Becoming a Charlatan
Follow-up: Choosing the Charlatan Career Path
Re-post: Peak Oil Stalwart to Shutter Forum/News Site, Persue Career as Astrologer
See also:
Technical analysis
Fundamental analysis
Divination for Dummies
Pitfalls in Prognostication: Fortune Magazine's August, 2000 "Ten Stocks to Last the Decade"

Robo-journalists: Beyond the Quakebot

From Knowledge@Wharton:

Robot Journalists: ‘Quakebot’ Is Just the Beginning
When an earthquake hit Los Angeles recently, Ken Schwencke, a journalist and programmer for the Los Angeles Times, was first to get the news out. Woken up by the tremors at 6:25 a.m. on Monday, March 17, he went to his computer and found a brief story already waiting, courtesy of a robot — an algorithm he developed and named Quakebot.

Quakebot’s role in the swift reporting of the earthquake story has industry observers talking about the role of robots in the future of journalism. Among those at the forefront of robot journalism is Noam Lemelshtrich Latar, dean of the Sammy Ofer School of Communications at the Interdisciplinary Center in Herzliya, Israel. Latar has written several papers on the topic, such as “The Future of Journalism: Artificial Intelligence and Digital Identities” and “Digital Identities and Journalism Content: How Artificial Intelligence and Journalism May Co-develop and Why Society Should Care.”

Latar has a master’s degree in engineering systems from Stanford and a Ph.D. in communications from MIT. His work has been concentrated in the area of touch-screen phones and allied devices. His paper, “Screen Feedback from Home Terminals,” was the first to explore this concept. Today, however, Latar is focusing on artificial intelligence and robot journalism. In this interview with Knowledge@Wharton conducted late last year, Latar discusses whether robots will one day replace human journalists.

An edited transcript of the conversation follows.
Knowledge@Wharton: What exactly is robot journalism?

Noam Latar: Computers have helped journalists to write, to find facts, since the middle of the last century. There was what we call data mining and analytics — data analytics — which helped journalists find the facts and do investigative journalism. So, this is not new. What is now developing is that the new programs — artificial intelligence (AI) programs — get the facts and write the story within a fraction of a second. Today, there are stories written in Forbes and other newsmagazines that are untouched by human journalists. The AI program writes the story, and the name of the journalist is really the name of a robot. There’s a company called Narrative Science in Illinois that is already doing it and has collected a lot of money from investors.

Knowledge@Wharton: Is this a new phenomenon, or has this been around for a while? Didn’t your research at MIT in the 1970s actually predict some of this?

Latar: No. My research predicted touch screens, which were later used by Steve Jobs. I did the first studies on interactive television. We studied how providing people in the television studio with devices to provide feedback would affect the group dynamics and the discussion dynamics. At that time, we did not predict robot journalism at all. Data mining has developed in the past 20 years.

Knowledge@Wharton: How pervasive is robot journalism?
Latar: It’s still in the initial stages because the programs really started in 2010. But they’re penetrating very quickly because the robot journalist has certain real advantages. First of all, it never forgets facts. It can do research very quickly. It never asks for a day off. And it can write the story within seconds. If you write the program correctly, [the robot is] not even biased. As you know, most journalists are biased about their stories. But the robot journalist, if you program it correctly, can be completely unbiased.

Knowledge@Wharton: So they don’t miss deadlines?...

See also:
Automating the Newsroom: The AP's Robot Copy Editor

An Equity Financed Banking System

Via the University of Chicago:

Toward a run-free financial system
John H. Cochrane 
April 16 2014
The financial crisis was a systemic run. Hence, the central regulatory response should be to eliminate run-prone securities from the financial system. By contrast, current regulation guarantees run-prone bank liabilities and instead tries to regulate bank assets and their values. I survey how a much simpler, rule-based, liability regulation could eliminate runs and crises, while allowing inevitable booms and busts. I show how modern communications, computation, and financial technology overcomes traditional arguments against narrow banking. I survey just how hopeless our current regulatory structure has become.I suggest that Pigouvian taxes provide a better structure to control debt issue than capital ratios;that banks should be 100% funded by equity, allowing downstream easy-to-fail intermediaries to tranche that equity to debt if needed. Fixed-value debt should be provided by or 100% backed by Treasury or Fed securities.
1.Introduction and overview
At its core, our financial crisis was a systemic run.The run started in the shadow banking system of overnight repurchase agreements, asset-backed securities, broker-dealer relationships,and investment banks. 
Arguably, it was about to spread to the large commercial banks when the Treasury Department and the Federal Reserve Board stepped in with a blanket debt guarantee and TARP (Troubled Asset Relief Program) recapitalization. But the basic economic structure of our financial crisis was the same as that of the panics and runs on demand deposits that we have seen many times before.
The run defines the event as a crisis. People lost a lot of money in the 2000 tech stock bust.
But there was no run, there was no crisis, and only a mild recession. Our financial system and economy could easily have handled the decline in home values and mortgage-backed security(MBS)values—which might also have been a lot smaller—had there not been a run.
The central task for a regulatory response, then,should be to eliminate runs. Runs are a pathology of specific contracts, such as deposits and overnight debt, issued by specific kinds of intermediaries. Among other features, run-prone contracts promise fixed values and first-come first-served payment....
...MUCH MORE (50 page PDF)

HT: Points and Figures blog:

It Wasn’t A Financial Crisis; It Was A Systemic Run

"Forgetful rats take more risks"

I was going to take the easy "banker" cheap-shot but then realized this little guy looked more buy side:

By studying the rats' behavior, researchers are examining the ways impulsivity, working memory, and cognitive flexibility may or may not interact. (Credit: Matt Baume/Flickr)

A new study finds that rats with impulsive tendencies tend to have poorer working memories. Scientists define working memory in people as the ability to hold details like a name or phone number in mind.

On the other hand, rats that avoided risky situations tend to have poor cognitive flexibility, which in this case means they were unable to learn a new way to get a food pellet after they had been trained to expect it from a different lever.

By studying the rats’ behavior, researchers are examining the ways impulsivity, working memory, and cognitive flexibility may or may not interact.

Published online in the journal Neurobiology of Learning and Memory, the study could provide animal models for people with certain mental disorders such as anorexia or addiction, says Kristy Shimp, a doctoral candidate at the University of Florida....MORE

Tuesday, April 22, 2014

Commodities--Why Did Tudor's Tensor Fund Close? (it's the AUM)

AUM and the timing of the inflows.
From All About Alpha, April 13, 2014:

What a Hedge Fund Failure Looks Like 
The Twittersphere couldn’t get enough of the news last week that hedge fund legend Paul Tudor Jones was shutting down one of his eponymous funds, the Tudor Tensor Fund (try saying Tudor Tensor 10 times fast).
And critics of hedge funds will jump to the conclusion that it’s a dangerous world out there among alternative investments, and investors need to be careful because even a legend like Paul Tudor Jones can’t make money, having to shut down his futures fund.  Some will throw around the term survivorship bias too, concluding that the indices composed of hedge fund returns won’t include this program moving forward as a way of saying the index over reports the performance of the asset class – never mind that the program is shutting down, that the Dow no longer includes buggy whip companies, either – or that the index still includes the past performance of the shuttered fund.

But just how bad was the Tensor performance that they decided to shut the fund down?  What does a hedge fund ‘failure’ actually look like? The answer is, not that bad… Here’s a snapshot of just how the Tensor Fund has performed since inception, having returned a total of 42% over that time after running up 77%, then drawing down -20% over the last three years.
(Vami growth of 1,000; Disclaimer: Past performance is not necessarily indicative of future results)
The relative performance wasn’t all that bad either, with Tensor outpacing their benchmark (managed futures) as well as the markets they track (commodities) as well as a few little known asset classes called Bonds and World Stocks.

The real story here isn’t really how this program performed or that Paul Tudor Jones can’t cut it in managed futures, the real story is the business side of the hedge fund business. I have no doubt that Tudor and their team believe this program will perform over the long-term and that this point likely marks a low for the model. But big hedge funds like Tudor know how the asset-gathering game works.

The Tensor Fund went from over $1 billion ($1.5 per our numbers) down to just $120 million over the last three years, and that is the reason the fund is closing, not anything to really do with performance, the skill of the manager, or expertise of the team. The closing of Tensor is more of a commentary on investors buying in at the top of a cycle and getting out at the bottom than anything else....MORE
Perhaps Monsieur et Madame would care to sample:

About time: "“US Nuclear Weapons Laboratory Discovers How to Suppress the Casimir Force“"

Wait. What?
Or a Saint?
Never mind.

From the Foresight Institute:
Physicists suppress 'stiction' force that bedevils microscale machinery
Whether or not MEMS (microelectromechanical systems) technology has use as a development path toward productive nanosystems, or atomically precise manufacturing, is unclear (see for example this series of posts on the Feynman Path by J. Storrs Hall), the problem of stiction in microscale mechanical systems has been used as a canard to criticize proposals for mechanical molecular machine systems. (For why this criticism is unfounded, see section 6.3.7 of Kinematic Self-Replicating Machines.) Nevertheless, MEMS is in its own right a very useful technology so it is gratifying to see that a solution to the stiction problem may be in sight. A hat tip to Dale Amon for pointing to this physics archive blog article “US Nuclear Weapons Laboratory Discovers How to Suppress the Casimir Force“:

The Casimir effect causes microscopic machines to stick fast. Now physicists have successfully tested a way to suppress this force

The Casimir effect is a strange and mysterious force that operates on the tiniest scales. It pushes together small metal objects when they are separated by a tiny distance.
That’s a problem because engineers are increasingly interested in building tiny machines with parts that move against each other on precisely the scale. For some years now, they’ve been thwarted by a problem called stiction in which the tiny cogs, gears and other parts in these machines stick together so tightly that the device stops working....MORE

"Sadly, The Picasso Ceramics Market Isn’t for the Entry-Level Collector Anymore"

For some reason I am reminded of a scene from some years ago.
I was at a circus, nice seats, near a woman shepherding two impeccably turned out scamps. One of the short people asked if they could ride the elephant and, as God is my witness, the woman said "Oh no, those elephants are for children who have never ridden an elephant."

From Art Market Monitor:
Artnet’s news service discovers the long-standing trend in Picasso’s ceramics. For the sake of the broader art market, it would be gratifying to see the Picasso Ceramics as an alternative to the very high prices in his painting and sculpture market that brings in a different set of collectors. Alas, that doesn’t seem to be the case:
“It is the most important masterpiece collectors in modern and contemporary art who are driving the higher prices you see,” Michelle McMullan, head of sales for Impressionist and modern art at Christie’s, told artnet News over email. “So many of the important collections we see now have ceramics. Someone who is into 1960s Picasso paintings will pair it with a few ceramics [the artist] made on the same day, even.” […]...MORE
 Well la-di-effin-da.

"Guess What? Pharma Got a Fever, and the Only Prescription is More Cowbell!"

On second thought, I may have misread this piece from Alphaville's The Closer post:
Deals fever grips pharmaceuticals industry....(Financial Times)...
 Anyhoo, it was 14 years ago this month:

We're So Proud: Our Second Most Popular Post Last Weekend Was "Bummer Kid, I'm the Ether Bunny"

Are folks coming to the blog for the incisive commentary?
The actionable markets discussion?
A breezy devil-may-care weltanschauung?

They visited for the  picture of the giant bunny, Darius.

A repost from Monday April 9, 2012:
From the Sunday Mail:

Easter Bunny arrested for drug possession after 'acting suspicious' while entertaining children
A mall Easter Bunny has been arrested after reported acting suspicious while on break - without any relation to hiding Easter eggs....MORE
Masked: Bolling was escorted into a dressing room during his arrest so that he could change out of his costume and the children would not see (file photo)
Masked: Bolling was escorted into a dressing room 
during his arrest so that he could change out of his 
costume and the children would not see (file photo)
Also from the Mail:
Meet the world's biggest Easter bunny, Darius the enormous Continental Giant, who weighs a whopping three-and-a-half stone and is 4ft 4in.
Darius, aged three, munches through an incredible 12 carrots a day to keep up his strength and fuel his amazing growth spurt.

He already held the title of world's biggest rabbit but has now smashed his own record after vets measured him a month ago and realised he had had grown another inch....MORE, including pics. 
Here's Birmingham's Sunday Mercury:

Georgia Hadley with her enormous rabbit Darius
IS this the real Easter bunny?

UBS: Gold Miners Aren't Minting It (GDX; GDXJ)

We're pretty negative on the group and probably will be until we see some juniors going bankrupt.
Front futures $1283.50 down $5.10,  Market Vectors Gold Miners ETF $23.73 Up 0.22.
From MoneyBeat:
Much has been said, little nice, about “cash costs”–the flimsy way gold miners tend to report how much it takes to dig an ounce of the precious metal out of the ground.

One reason for the skepticism about the much-maligned indicator is that it excludes everything from exploration and capital expenditure costs to overhead and other expenses that make up the day-to-day costs of running a mining business.

In a note to clients Monday, UBS estimated that industrywide cash costs for gold averaged $728 per ounce in the fourth quarter. With gold prices averaging about $1,271 per ounce in the quarter, that implies a margin of $543. Not bad, right?

But when UBS digs deeper, it finds the all-in cost was a much loftier $1,205, resulting in a much slimmer margin of $67 per ounce....MORE
Goldman Sachs on Australian Gold Miner Cash Costs
"Cash Costs A Better Indicator Of Pressure On Gold Mining: Citi" (GDX; GDXJ)
Gold Miners: A Fool And His Money (GDX; GDXJ; GLD)
Barclays: "If Gold Was "Just A Commodity" What Would Be Its Support Price?" (ABX; G; GLD; NEM)
UPDATED--Gold is Going Much Lower
Gold Collapses, Approaching Gold Miners Cost Threshold (Infographic)

Here's the 6 month chart of the ETF vs. the S&P:
Chart forMarket Vectors Gold Miners ETF (GDX)

Debt as Money--Roxana: The Fortunate Mistress

From Thoughts on Economics:

Daniel Defoe On Debt As Money 
In this passage, Roxana is preparing to move from Paris to Amsterdam. She liquidates her possessions, and uses jewelry and bills of exchange as money to carry with her.
"I could not but approve all his measures, seeing they were so well contrived, and in so friendly a manner, for my benefit; and as he seemed to be so very sincere, I resolved to put my life in his hands. Immediately I went to my lodgings, and sent away Amy with such bundles as I had prepared for my travelling. I also sent several parcels of my fine[Pg 181] furniture to the merchant's house to be laid up for me, and bringing the key of the lodgings with me, I came back to his house. Here we finished our matters of money, and I delivered into his hands seven thousand eight hundred pistoles in bills and money, a copy of an assignment on the townhouse of Paris for four thousand pistoles, at three per cent. interest, attested, and a procuration for receiving the interest half-yearly; but the original I kept myself.
I could have trusted all I had with him, for he was perfectly honest, and had not the least view of doing me any wrong. Indeed, after it was so apparent that he had, as it were, saved my life, or at least saved me from being exposed and ruined—I say, after this, how could I doubt him in anything?
When I came to him, he had everything ready as I wanted, and as he had proposed. As to my money, he gave me first of all an accepted bill, payable at Rotterdam, for four thousand pistoles, and drawn from Genoa upon a merchant at Rotterdam, payable to a merchant at Paris, and endorsed by him to my merchant; this, he assured me, would be punctually paid; and so it was, to a day. The rest I had in other bills of exchange, drawn by himself upon other merchants in Holland. Having secured my jewels too, as well as I could, he sent me away the same[Pg 182] evening in a friend's coach, which he had procured for me, to St. Germain, and the next morning to Rouen. He also sent a servant of his own on horseback with me, who provided everything for me, and who carried his orders to the captain of the ship, which lay about three miles below Rouen, in the river, and by his directions I went immediately on board. The third day after I was on board the ship went away, and we were out at sea the next day after that; and thus I took my leave of France, and got clear of an ugly business, which, had it gone on, might have ruined me, and sent me back as naked to England as I was a little before I left it." -- Daniel Defoe, Roxana: The Fortunate Mistress (1724).
Defoe's novel, Robinson Crusoe, is more well-known among economists. For example, one can read Stephen Hymer's "Robinson Crusoe and the secret of primitive accumulation" (Monthly Review, 1971).

How the Market Trades Under Threat of QE Wind-down

Correlation ≠ causation; Your mileage may vary; trend/friend/bend/end etc. etc.

From Afraid to Trade:

Are We Really Repeating this SP500 Pattern Again?
Could we be caught in the Twilight Zone again and doomed to repeat the same outcome in the market?
Let’s take a look at our broader S&P 500 chart and highlight a repeat bullish outcome pattern and chart where we are and how far we have to go at the moment to repeat it again.
S&P 500 Repeat Pattern Recognition
Each green rectangle above represents a strong impulsive or “bar-over-bar” non-stop upward price action as the uptrend continues.

Many of these bar-over-bar impulse swings have been fueled by a short-squeeze or capitulation of the bears, particularly after “Bear Traps” triggered (with breaks under the rising 50 day EMA)....

As we were saying, even in the depths (okay, 7% drawdown) of the January collapse, it's still a bull market.

"Pop-Up Investment Banks Are the Latest Trend"

Matt Levine at Bloomberg (come for the verbiage, stay for the footnotes.*):
James Stewart's New York Times article this weekend about Paul Taubman contains multitudes, but not multitudes of bankers. There's just one! It's Paul Taubman, formerly the head of mergers and acquisitions at Morgan Stanley and now the head of mergers and acquisitions in his kitchen.1 But his kitchen keeps busy; he's number 11 in the global M&A league table for the past year, with credits for Verizon's $130 billion acquisition of Vodafone's Verizon Wireless stake and Comcast's bid for Time Warner Cable.2
And he's apparently part of a micro-trend of micro-advisers that also includes the Zaoui brothers and all those guys named Simon. Stewart:
Bankers have already coined a new catchword for such small firms: “kiosks,” as opposed to the somewhat larger “boutiques,” like Moelis & Company, founded by Kenneth D. Moelis, which went public this week.

Such arrangements can be fabulously lucrative, since kiosks have little or no overhead but are still paid as a percentage of the total cost of a successful deal. Clients receive the benefit of the undiluted attention of a top merger and acquisition strategist.
Taubman's kiosk, PJT Capital, is in fact pretty lucrative; "he earned more than $10 million on the Verizon deal and may make at least that much if the Time Warner Cable acquisition succeeds," and you could spend all day thinking about what that $20 million revenue means. Let's!

First I guess you could talk about comp ratios. Banks typically pay their bankers some percentage of the revenue they bring in, ranging from around 32 percent at JPMorgan (a universal bank) through 37 percent at at Goldman Sachs (a full-service investment bank) to 64 percent at Moelis & Co. (an advisory boutique). I don't have PJT Capital's audited financial statements but I'm gonna guess that its comp ratio is right around 100 percent.3
So what, of course; Taubman also put up 100 percent of PJT's capital, so he's both the employee and the shareholder.4 But what if a(nother) bank wanted to hire him? If Taubman brings in, and executes, $20 million of business by himself, how much should a bank be willing to pay him? If they give him $19 million, isn't that a good deal for them? It's $1 million they didn't have before, anyway. Obviously banks have risk and overhead and other issues to worry about, but in this age of declining comp ratios Taubman perhaps offers a good contrarian argument. "Pay me more or I'll go start a kiosk," a senior rainmaker might say, now that "kiosk" is a thing....MORE
The SEC Explains Why It's Okay That SEC Employee Stock Trades Earn 4 to 8.5% Excess Returns
Following up on "Portfolios of SEC Employee Stock Picks Earn Excess returns of 4-8.5% Per Year".
Matt Levine at Bloomberg (footnotes baby, footnotes!)...
The Last Word On Asness' Alpha, Buffet's Beta and The Failure of Commodity Quants (and how to turn hyperlinks into footnotes)
In Case You Missed It, Matt Levine Has Left DealBreaker
Between Bess' headlines and Matt's footnotes they had the biz covered in inimitable (I've tried) fashion.
From DealBreaker:
Housekeeping: So Long To Matt

The Trouble With Soybeans: How China's Commodity-Financing Bubble Becomes Globally Contagious

From ZeroHedge:
"Marubeni [the world's largest soybean exporter to China] is deluded in thinking that payments will come once the cargoes have sailed," is the message from an increasing number of liquidity-strapped Chinese firms, "If they take these cargoes, some could go bankrupt. That's why they choose not to honor the contracts." As we explained in great detail here, this is the transmission mechanism by which China's commodity-financing catastrophe spreads contagiously to the rest of the world. A glance at the Baltic Dry is one indication of the global nature of the problem (and Genco Shipping's $1 billion bankruptcy), but as Reuters reports, "If buyers cannot resolve the issue, they may also cancel future shipments."

Reuters notes that China's soybean imports in the first quarter jumped 33.5 percent, a record for the quarter and industry sources see a rush of cargoes in the second quarter. The rise comes amid an increasing use of soybeans in financing trades to secure credit.
Traders estimate more than 10 million tonnes of soybeans, out of China's imports of 63.4 million tonnes last year, are imported for financing annually.
And the lack of liquidity and forced losses means China's buyers ain't paying...
Chinese buyers may default on a further 1.2 million metric tons (1.32 million tons) of soybeans worth about $900 million being shipped from the United States and South America, to avoid incurring huge losses in a depressed local market, the country's top soy buyer said....

Why We Suggested Buying Natural Gas Equities (FCG)

In February we reiterated a couple January 2014 posts, just to drive the point home.
Here's the equity-based First Trust ISE-Revere Natural Gas Index ETF via Yahoo Finance:
Chart forFirst Trust ISE-Revere Natural Gas Idx (FCG)

It took a while to get going but compared to the continuous front month futures from FinViz:
It did just fine.
The stocks still have room to run.

From our February 20, 2014 post "Natural Gas: Storage Report Comes In As Expected, Futures Drop":
...We have been so successful switching electrical generating plants from coal to natural gas, have built almost $100 Billion of chemical co. infrastructure to take advantage of natty and have had some (small as a percentage) uptake of natural gas powered transportation that we may have trouble building storage reserves for the 2014-2015 heating season.

Be careful what you wish for eh?

That is why you saw stuff like this on Jan. 22:
Back on Jan. 9 we suggested buying Exploration & Production companies for the first time in years just because the certainty level seemed higher with the equities than the futures, not out of any deep insight (bold highlighting done today):
Natural Gas: Price Collapses on EIA Numbers, Market Yawns at Next Week's Projected 300 Bcf Withdrawal Report
After hitting $4.4300 on Tuesday (from $4.2560 Friday, memento mori) the front futures have fallen to $4.0300, down $0.1860 just today and barely above the day's low of $3.9990.

And I'm thinking it may be time to look for some gas producer stocks.

The estimated withdrawal to be reported Jan. 16 report is far and away a record at the same time volume in storage is 10% below the five-year average and Tuesday's STEO says marketed production grows at an average rate of 2.1% in 2014 and 1.3% in 2015.

Production growth is slowing at the same time we've convinced utilities to switch wholeheartedly from coal and the government does by administrative orders what it can't do by parliamentary means (see this week's New Source rules from the EPA in the Federal register).

So, it's either equities or longer-dated futures, we just passed a turning point kids.
Here are some instruments to give you ideas should you not have a four-star, weekend special, single-stock  guaranteed lock on the tip of your tongue.

AMEX NATURAL GAS INDEX (XNG) 791.11 Down 11.57 (1.43%)
First Trust ISE Revere Natural Gas (FCG), $18.94-0.32 (-1.66%) which is the basis for the triple-levered Direxion Daily Natural Gas Related Bull 3x ETF (GASL), $30.82-1.73 (-5.31%), which is not something to buy til death do you part but which should hold its own while the inverse GASX, $27.81 +1.36 (+5.14%) collapses giving you a pair trade.
Do note the leverage in the last two....
So there you go....
Be that as it may, we're doing the picking up pennies in front of a steamroller thing, recommending a short in the face of all this just because the ascent was losing momentum. And as noted in one of the Tesla posts:....
So there you go.
FCG closed at $22.53 yesterday.
The index, XNG is at 894.88, GASL at $50.20 is the best performing (YTD) equity-based ETF and GASX at $15.44 may be the worst although I haven't checked.

See also:
Energy Is About to Get More Expensive (XLE; ERX)
Natural gas: Not Storing Nearly Enough to Avoid Calamity, Futures Jump 4%

Rising Global Ultra-Rich Are Outbidding Dealers for Art—and the Dealers Don’t Like It (Piketty cameo)

From Art Market Monitor:
Scott Reyburn latches on to the book of the moment, Thomas Piketty’s Capital in the 21st Century, and tries to apply some of its findings to the art market. Of course, the art market is a product of a the emergence of a global class of “ultra high net worth individuals” who congregate around, and communicate through, the world-wide cavalcade of the art market.

Piketty’s essential point is that as long as invested capital produces a greater rate of return than economic growth, wealth accrues to the owners of capital. Reyburn mistakenly tries to apply this idea to the art itself. But Piketty’s point isn’t that a few wealthy persons will make all the money from art:
Courtesy of the above-growth returns identified by Mr. Piketty, the rich are further increasing their wealth by buying art. Many millions have been made by a new breed of investor-collectors who buy Bacons, Warhols and Richters high, and sell even higher. Art by desirable investment-grade names makes the rich richer. And more and more wealthy individuals are now prepared to make bids of more than $100 million at auctions, while outside, beyond the shiny bubble of the art world, living standards in the rest of society stagnate or decline.
Although the trend, if Piketty is correct, will be toward an even greater concentration of wealth the numbers continue to enlarge the size of this global class from the current few hundred thousand to several millions. Even with this prospect of having a greater population of potential buyers, Reyburn quotes art dealers and their near-sighted frustrations:
“This is well beyond the norms of inflation,” said Ivor Braka, a London dealer who has been buying and selling high-value art since 1978. “The art market has become an excuse for banking in public. People are displaying wealth in the most ostentatious way possible. It’s luxury goods shopping gone wild.”
“People are spending millions on works by artists who have questionable long-term value,” Mr. Braka said.
“Do they have taste?” he added. “I don’t know. That’s capitalism. You can spend money on what you want.”
Can an Economist’s Theory Apply to Art? (NYTimes)

Monday, April 21, 2014

"McKinsey Gives “Dare to Be Great” Speech to Private Equity Investors as Returns Fall"

From naked capitalism:
McKinsey has issued a new report on the private equity industry that ought to give any investor cause for pause. The consulting firm, which just happens to have private equity firms as as major source of revenue, is a bit too obviously engaging in porcine maquillage. The report describes enthusiastically how private equity has been an even better investment strategy than most people thought. The white paper makes only passing allusion to the fact that returns in recent years haven’t been all that good; “many general partners are struggling to raise new funds on the heels of disappointing recession-era vintages.” Industry average returns have been lower than plain old stock indexes. Notice how McKinsey omits the recent crappy years from this chart:
Screen shot 2014-04-20 at 4.16.23 AM
I’m also curious as to how they constructed that levered equity return line. Intuitively it doesn’t look right, but I don’t have a way to check the data.
By calling lower returns “recession era,” the article implies that the economy is to blame. But a more probable culprit is too much capital chasing too few promising companies. Private equity has more than doubled relative to the size of global equity markets since 2000: it was 1.5% of global equity market cap (and remember, this was the peak of the dot com bubble) and rose to 3.9% as of 2012. The competition for deals is fierce; I’ve been told for more than 7 years that any middle market company that was auctioned would get at least 40 bids. If you have to pay a full price for companies, it’s a lot harder to make juicy returns. And that raises the specter that underwhelming performance will persist.

One rationale for investing in private equity has been that the top quartile funds (meaning the best 25%), showed persistent good performance. McKinsey has to admit that this justification for investing in private equity is also a thing of the past:
Other McKinsey analysis finds that the persistence of returns—in particular the tendency of top firms to replicate their performance across funds—is not nearly as strong as it once was. Until 2000 or so, private-equity firms that had delivered top-quartile returns in one fund were highly likely to do so again in subsequent funds. Knowing that yesterday’s winners were likely to excel again today enabled limited partners to focus their due diligence on identifying top-quartile funds.
Since the 2000 fund vintage, however, this persistence has fallen considerably.
Screen shot 2014-04-20 at 4.25.47 AM
Notice that McKinsey tacitly accepts that it was reasonable to believe that investors could identify and invest exclusively in these top-quartile funds. We pointed out that logical fallacy in a recent post....