Wednesday, August 20, 2014

"...Gold Weakens in Wake of Hawkish FOMC Minutes"

Higher real rates really mess with the opportunity cost losses computation for holding gold.
From Kitco:
Gold prices sold off moderately in the aftermath of FOMC minutes that revealed Fed officials believe the U.S. labor situation is moving closer to normal, and with other clues hinting the Fed could raise interest rates sooner than many expected. December Comex gold was last down $6.50 at $1,290.20 an ounce. Spot gold was last quoted down $5.90 at $1,289.75. December Comex silver last traded up $0.009 at $19.485 an ounce.

The FOMC minutes report was the economic highlight of the day for the market place. The Fed officials’ wording that the U.S. labor situation continues to improve fell into the camp of monetary policy hawks, as it hinted the U.S. central bank could move to raise interest rates sooner than many expected.

Now, focus turns to later this week and the annual Kansas City Federal Reserve meeting in Jackson Hole, Wyoming, that begins on Thursday. The confab of world central bankers has in the past yielded important U.S. monetary policy speeches and clues to the direction of monetary policy. Fed Chair Janet Yellen and ECB President Mario Draghi are scheduled to speak on Friday in Jackson Hole....MORE
Here's Kitco spot, $1291.10:
24 hr gold chart
 

Warren Buffett on Intelligence

From Farnam Street:

What makes Warren Buffett a great investor? Is it the intelligence or the discipline?

Warren: The good news I can tell you is that to be a great investor you don’t have to have a terrific IQ.
If you’ve got 160 IQ, sell 30 points to somebody else because you won’t need it in investing....

...MORE

HT: The Big Picture's Wednesday AM Reads

Now, what if one is approaching from the other direction?

Grantham Mayo Van Otterloo's 7-Year Return-vs-Volatility Investing Soufflé

Mr. Grantham did not use the term "Investing Soufflé", that was me, looking for an alternative to 'matrix'.
http://www.zerohedge.com/sites/default/files/images/user5/imageroot/2014/08/Today%27s%20Beta%20Desert.jpg
From ZeroHedge:

GMO: "There Is No Safe Place To Hide"
We have been writing quite a bit about why asset allocation today is in one of the toughest investing environments we’ve ever encountered. And it’s not just because we think equity markets are overvalued.
No, we’ve seen that plenty of times before over the past decade or so. Remember the technology bubble of the late ’90s? That was challenging, sure, but what got lost in the shuffle was that while U.S. large-cap stocks were outrageously overpriced, it turned out that real estate investment trusts, emerging equities, and international small caps were deliciously priced.
And it was perfectly clear to us what we had to do: avoid technology and own the cheap stuff, even though it might have looked a bit unconventional. Then we entered the 2007–2008 credit bubble, and while, yes, virtually all equity markets were overpriced, it was perfectly clear to us what we had to do: hide and wait. And that was not a bad proposition because there were plenty of safe places to hide—Treasury Inflation-Protected Securities, U.S. Treasuries, and a strategy we had developed called Alpha Only—and earn a decent, if not spectacular, return....MORE

Private Equity: Carlyle raises $1.86bn for international energy fund

From altAssets:
Private equity giant The Carlyle Group has registered $1.86bn commitments for its International Energy Partners fund.
The capital has been raised via investments from 146 LPs, according to the firm’s filing with the US securities regulator.

Carlyle has also listed $2.5bn worth of sales commission which the firm says will be borne by the GP and the not the fund’s investors.

The Energy Partners vehicle was launched in August last year and has so far its investment portfolio includes oil and gas platform Varo Energy and energy company Discover Exploration based in London....MORE

AllianceBernstein: "Is a Big Equity Correction Imminent? Not Yet"

The S&P 500  is seven points from its all-time high, 1984.29 last, the DJIA is trading at 16956.14.
From Context, the AllianceBernstein blog:
Many investors think US stocks are due for a correction: They feel that the market has run too far, that the Fed has been slow to act, that complacency has created pockets of excess. Do these gut feelings mean a major equity correction looms? Not yet, in our view.

The S&P 500 Index has seen 16 one-year corrections of at least 15% since 1927. These corrections were preceded by sharp equity run-ups, and we’ve seen a comparable return streak recently. This is consistent with the intuition that equity corrections follow on the heels of excessive optimism.

Common wisdom—colored by 2007—says corrections are preceded by complacency, but this doesn’t bear out historically. Trailing volatility and asset correlations in precrisis periods—the “price” of risk—are roughly in line with historical averages. Of course, even if complacency doesn’t seem to precede corrections, that doesn’t mean it should be ignored. The take-away is that cheap capital can boost asset prices much longer than appears rational. The key in today’s market is to monitor and hedge exposure to areas of excess that are forming in the markets because of abundant liquidity and cheap risk.

A Historical Perspective
Almost every economic recession since 1950 followed a flat or inverted yield curve, and most equity corrections have followed a flattening yield-curve slope. The current yield curve is still very steep in historical terms, but the recent flattening is consistent with fears that the Fed is slow to respond—and that the eventual withdrawal of liquidity will hurt economic growth. The big issue is timing: equity markets generally rally early in rate-hike cycles and decline only after interest-rate policy is viewed as hurting future growth. When rates rise from very low levels, equity returns are actually strongest (Display).
What about the most obvious indicators of an equity correction: earnings and valuations?

Surprisingly, earnings per share fell in just over half of the market corrections since 1950. This is at odds with many investors’ views, which are anchored in the last two corrections, 2000–2001 and 2008. Those corrections happened during recessions, and were extreme in the context of earnings declines at the time...MORE

Loss of Skills In the Workforce

Been there, done something
From The Growth Economics Blog:
There’s a recent working paper by Alexandra de Pleijt and Jacob Weisdorf that looks at skill composition of the English workforce from 1550 through 1850. They do this by looking at the occupational titles recorded in English parish records over that period, and code each observed worker by the skill associated with their occupation. They use the standardized Dictionary of Occupational Titles to infer the skill level for any given occupation. For example, a wright is a high-skilled manual laborer, a tailor is medium-skilled, while a weaver is a low-skilled manual laborer.de Pleijt and Weisdorf 2014
The big upshot to their paper is that there was substantial de-skilling over this period, driven mainly by a shift in the composition of manual laborers. In 1550, only about 25% of all manual laborers are unskilled (think ditch-diggers), while 75% are either low- or medium-skilled (weavers or tailors). However, over time there is a distinct growth in the the unskilled as a fraction of manual laborers, reaching 45% by 1850, while the low- and medium-skilled fall to 55% in the same period. You can see in their figure 10 that this shift really starts to take place by 1650, while before the traditional start of the Industrial Revolution.

Looking at more refined measures, de Pleijt and Weisdorf find that the fraction of workers classified as “high-quality workmen” – carpenters, joiners, wrights, turners – rose only from 3.9% to 4.9% of the workforce between 1550 and 1850. These are precisely the kinds of workers that Joel Mokyr claims are the crux of the Industrial Revolution in England. They built, improved, adapted, and micro-innovated all the classic inventions of the IR. While they were only between 4-5% of the workers, and this proportion didn’t expand rapidly, given population growth the absolute numbers of these high-quality workmen went up by a factor of 4 between 1700 and 1850 (from about 200K to 850K)....MORE

Score! Swiss dairy exports profit from Russian embargo

There is an entire subculture (!) of cheese puns that I won't inflict on gentle reader, save for the granddaddy:



From Swissinfo:

Dutch Gouda, Italian Parmesan and other cheeses have been banned from Russian supermarkets. Swiss cheeses are filling some of the gaps.
On the shelves of Moscow’s supermarkets, European cheeses have begun to thin out. Swiss production however isn’t enough to fill the gap, and a mountain of paperwork is in the way. It’s not easy to get a foothold in Russia.

The Margot cheese warehouse in Yverdon is one company impacted. It isn't as well as known as other Swiss brands, but the company is the number one Swiss exporter to Russia. Since the European embargo, orders have tripled.

While Europeans accuse Switzerland of exploiting the embargo, Swiss companies are asking for more clarity from the Swiss authorities.

A good share of the market is there for the taking, although it is still a niche market catering to the wealthiest Russians. European products, sold at €2 a kilogram, are much cheaper than Swiss ones....MORE
Now I will retreat, Caerphilly avoiding the temptation to wordplay...

"Patent troll drops suit against Adam Carolla after discovering podcasts don't make any money"

That's the headline at the Verge about the guy who says he has the patent for podcasting.
Here's their link to the ars technica write-up on the lawsuit settlement:
Patent trolls have a simple business model: they collect broad patents that appear to cover some part of an industry, and then they sue everyone, hoping that most companies will choose to pay a settlement over the hassle and cost of a lawsuit.

That's what Personal Audio did with podcasters: the company has a patent that appears to cover distributing podcasts over the internet, and it began filing lawsuits against several popular podcasters, including Adam Carolla and How Stuff Works. There was only one problem: there's no money in podcasts, so Personal Audio decided it wasn't worth the cost to collect whatever percentage of revenue it was demanding from the companies it sued. Here's a press release the company issued in July (emphasis added):
"When Personal Audio first began its litigation, it was under the impression that Carolla, the self-proclaimed largest podcaster in the world, as well as certain other podcasters, were making significant money from infringing Personal Audio's patents. After the parties completed discovery, however, it became clear this was not the case. As a result, Personal Audio began to offer dismissals from the case to the podcasting companies involved, rather than to litigate over the smaller amounts of money at issue."
While other companies took the dismissals in July, Carolla apparently pushed back until now. We don't know the exact terms of the settlement, but a motion to dismiss was filed yesterday and both parties agreed to a quiet period that will last through September 30. As the EFF pointed out yesterday, if suing a podcaster with the reach of Adam Carolla isn't a profitable enterprise, it's probably not worth it to sue any podcasting group. Score one for the little guys with no money....MORE
The memory jog to link this piece was this morning's FT Alphaville post "Patent trolls as the new rentier class":
According to the Merriam-Webster dictionary, a rentier is a person who lives on income from property or securities.

From the point of view of Marxist rentier capitalist theory, a rentier is also a parasite who adds no value to society, but instead survives solely due to his ability to extract rents (tribute) from productive people. A rentier achieves this through muscle or social norms which defend his exclusive rights over property in such a way that he must be compensated for their use by others.

Today, patent trolls are emerging as the world’s most nefarious rentier types.

The reason they’re so particularly nefarious, we’d argue, is directly linked to the type of property that they’re trying to monopolise. Intellectual property.

Organised productive society has always had to deal with parasites, of course....MORE

Russian sanctions means extra focus on Raiffeisen Bank tomorrow

The first sentence of this heads up says Friday but the company writes the semi-annual release date is the 21st.
From Saxo Bank's Trading Floor blog:
Raifeissen Bank, Austria's largest banking group, reports its Q2 results on Friday at approximately 05:30 GMT. The release will undoubtedly attract many investors as the shares are down 27% since their peak in June. The reason behind this dramatic fall is the ongoing crisis in Ukraine and the subsequent sanctions against Russia, a market that accounts for 21% of the group's total revenue.
RBI share price
Source: Bloomberg, Saxo Bank
  • All eyes on bad loan provisions tied to Russia and eastern Europe... but also a previously announced provision charge in Hungary tied to a new law which obliges banks to refund FX spread margins. The bank's exposure to Russia and Ukraine will be a particular focus for investors tomorrow as they have pushed the share price down to reflect increased uncertainty over profitability. Raiffeisen Bank is the third biggest foreign bank in Russia and generated 74% of the group's pretax profit last year....MORE

New York Fed: The Declining U.S. Reliance on Foreign Investors (that's not necessarily good)

From the Federal Reserve Bank of New York's Liberty Street Economics blog:
The United States has been borrowing from the rest of the world since the mid-1980s. From 2000 to 2008, this borrowing averaged over $600 billion per year, which translates into U.S. spending exceeding income by almost 5.0 percent of GDP. Borrowing fell during the recent recession, as would be expected, and then rebounded with the recovery. Since 2011, however, borrowing has trended down and fell to 2.4 percent of GDP in 2013, the smallest amount as a share of GDP since 1997. A reduced dependency on foreign funds can be viewed as a favorable development to the extent that it reflects an improvement in the fiscal balance to a more easily sustainable level. However, it also reflects the lackluster recovery in residential investment, which is one reason the economy has yet to get back to its full operating potential.

    The amount borrowed from the rest of the world is measured by the current account balance, which is the broadest measure of cross-border transactions. As seen in the chart below, the United States was spending substantially above its income before the recession, to the tune of 5.8 percent of GDP in 2006. The amount of borrowing fell during the recession and started to rebound in 2010, but borrowing has since trended down.

U.S. Borrowing from Abroad

    A nation’s foreign borrowing is the difference between domestic saving and investment spending. Consider simplified national accounting identities with income allocated to consumption or saving and spending allocated to consumption or investment. Dropping out consumption from both identities shows that the difference between spending and income is the same as the difference between saving and investment spending, with the gap determining whether a country is lending to or borrowing from the rest of the world. That is, a country borrows from the rest of the world when it does not save enough to finance its own investment spending. From this perspective, the United States is borrowing less because the difference between saving and investment spending is shrinking. ...MORE

"Private equity follows hedge funds into reinsurance for long-term capital"

Great, more capacity.
Short 'em all.
From Artemis:
It’s not just hedge funds that are entering the insurance and reinsurance market in search of so-called long-term capital to put to work in their strategies, private equity firms targeting the space are also seeking opportunities to add assets under management.

The entry of large private equity investors into the insurance and reinsurance market in recent years has led to much discussion of the reasons for this move, according to this Institutional Investor article, as well as to discussion at regulator level whether it is in the industries best interests.

This discussion has been even louder in the case of private equity firms tapping low-returning business, such as the fixed annuities space, but what these firms are seeking is, much like the hedge funds, a new source of capital to boost their assets under management and to earn them fees in return for managing it.

In particular the article highlights that private equity firms have been buying life and annuity companies, with predictable lines of longer-tailed business, perfect for generating that all important float for investment purposes.

Here is where the regulators come in. Generally the regulators have a concern that private equity firms may move life and annuities insurers investable assets into riskier asset classes, in an effort to generate an outsized return.

However, data from SNL Financial shows that two of the leading proponents of this strategy, Apollo’s Athene Holding and Guggenheim Capital, have not made drastic changes to the investment portfolios of insurers they have bought, in fact any changes made to the asset mix have been in-line with the life insurance industry as a whole....MORE

The Bottom Is In For Interest Rates

From Investing.com:

Charts Confirm An Interest-Rate Bottom
Last Friday, interest rates hit 2.30% on the 10-year bond. While counter intuitive, this looks like a long-term bottom prior to a move back to 3%. The charts always tell us the truth, so let's take a look. First, note the large sell on Friday with huge volume. This can be seen clearly on the ProShares UltraShort 20+ Year Treasury (ARCA:TBT). The volume was the biggest since interest rates last bottomed in early-mid 2013. That's called 'capitulation', and is clear signal of a bottom. In addition, the following day (Monday) interest rates did a complete reversal of their down move. That's known as a 'reversal candle' and is a major sign that we're near a bottom.

These signals are clearly telling us that rates will begin to move higher and could see 3% by year's end.
 ProShares UltraShort 20+ Year Treasury
ProShares UltraShort 20+ Year Treasury

Here's the CBOE 10-year, currently 2.405 up 0.0180:
Chart forCBOE Interest Rate 10 Year T No (^TNX)

Tuesday, August 19, 2014

"Delivery Start-Ups Are Back Like It’s 1999"

Hmmmmm.
From the New York Times:

Last year, I was excited to hear about a new start-up in San Francisco that delivered cheap bottles of wine within an hour. It was called Rewinery, and it was fantastic. I ordered a $5 malbec one day and a $10 chardonnay the next, delivered by bike courier for a modest fee. Already, San Francisco was crawling with bikes, inching up the hills, shuttling sushi and groceries and new clothes, all summoned with the tap of a finger. But Rewinery was the first of the delivery start-ups that made me feel the way I felt back in 2000, when I could order a video and a pint of ice cream to my doorstep from Kozmo.com. Rewinery felt too good to be true.

It was. One day, seeking refreshment, I opened the app to find that Rewinery had gone out of business.
In the tech crash of the early 2000s, on-demand delivery services like Kozmo and Webvan weren’t just among the most colossal failures. They also became a sort of grim joke, symbolizing the excess that portended the bust. Afterward, conventional wisdom hardened: Web-enabled delivery was not a good business because it simply cost too much to build warehouses, manage an inventory and pay drivers. There was too little opportunity to recoup expenditures in delivery fees; people will pay only so much for toilet paper to be delivered before they decide to fetch it themselves.

But something is in the air of late, making hindsight blurry. Despite the early demise of Rewinery and the shrunken ambitions of others, such as eBay Now, similar start-ups with names like Caviar, SpoonRocket and DoorDash have raised half a billion dollars in investment in the last year, according to CB Insights, which tracks venture capital. Even Louis Borders, the founder of Webvan (as well as the Borders bookstore chain, another Internet casualty), is at work on a grocery delivery start-up. Uber is using the $1.4 billion it just raised to expand beyond delivering people to delivering things. Meanwhile, venture capitalists joke that every other entrepreneur they meet pitches an “Uber for X,” bringing goods and services on demand: laundry (Washio), ice cream (Ice Cream Life), marijuana (Eaze) and so on. Investors are stuck wondering whether this is 2000 all over again, or whether this new breed of delivery start-ups can succeed where the last crop so famously failed.

John A. Deighton, a Harvard Business School professor who wrote a case study on Webvan, likes to compare the delivery business to shining shoes. “You make as much profit on one shoe as you do on a thousand shoes,” he said. “There’s just no scale.” In years past, it was difficult for Deighton to even teach his students about Webvan, because its fatal flaws were so obvious. They didn’t understand how the euphoria of the dot-com boom could have obscured its shortcomings. But in the last year, he has been asked to teach it three times. “Something has changed,” he said....MORE

Whoa!: "SpaceX Denies Funding and Valuation Rumors"

Following up on "Elon Musk's SpaceX Is Raising Money At A Valuation Approaching $10B".
From recode:
TechCrunch reported earlier Tuesday that Space Exploration Technologies was in the midst of a large fundraising round that would value the company at just under $10 billion. But the private space flight company has denied the story in an email to Re/code. SpaceX Communications Director John Taylor said: “SpaceX is not currently raising any funding, nor has any external valuation of that magnitude or higher been done. The source in this report is mistaken.” Earlier SpaceX funders and others named as prospective investors declined to comment or weren’t immediately available.
Regret the error etc.
(more like:  I acknowledge mine iniquities: wherefore, I humbly beseech thee, forgive me)

The1930s New Yorker Style Guide for Today’s Modern Blogger

From Pando:
Fans of James Thurber will hopefully be well familiar with his memoir about his time spent at the New Yorker, working with its founding editor, Harold Ross. ‘The Years With Ross‘ was first published in 1958 and is still in print.

Flipping back through an old (1959) copy of the Penguin paperback edition the other day, I landed on Thurber’s long extract from a memo by New Yorker copy editor Wolcott Gibbs, in which Gibbs shares with Ross some of his rules for editing the magazine’s fiction writers. (Journonerds will probably best know Gibbs for his famous ‘Backward ran sentences until reeled the mind‘ parody of Time magazine’s ‘Timespeak’.)

Although the memo was first written in the 1930s, twenty years before Thurber quoted from it, I was struck by how many of Gibbs’ principles are applicable to most of today’s bloggers who dabble in long-form, including those of us who work at Pando. I’ve quoted the relevant ones below, including Thurber’s introduction.

(Hopefully it goes without saying that the links have been added by me. Gibbs wasn’t that prescient. Any typos that have slipped in during transcription are my doing, too.)
Here’s Thurber’s introduction to Gibbs:
Wolcott Gibbs has never got the attention he deserves. He was easily, not just conceivably – to use one of his favourite words – the best copy editor the New Yorker has ever had. For years he had to deal with the seventy per cent of New Yorker fiction that has to be edited, often heavily, before it reaches print. Gibbs, an accomplished parodist, was always able to fix up a casual without distorting or even marring its author’s style.
He was inimitable, as such word experts are, but when he quit as copy editor in the fiction department to become the magazine’s dramatic critic and to write some of its best casuals and profiles, he wrote and sent to Ross – this must have been twenty years ago – what he called ‘The Theory and Practice of New Yorker Article Editing’, based on his experiences, often melancholy, with the output of scores of writers, male and female.
The final straw, in his editorial career, was a casual that began: ‘Mr West had never been very good with machinery.’ Here was the little man, a genre sometimes called, around the office, the Thurber husband, popping up for the thousandth time, and it was too much for the Gibbsian nerves. The Gibbs essay on editing, which has not been published before, follows:
And here’s the memo itself:
THEORY AND PRACTICE OF EDITING NEW YORKER ARTICLES
The average contributor to this magazine is semi-literate; this is, he is ornate to no purpose, full of senseless and elegant variations, and can be relied on to use three sentences where a word would do. It is impossible to lay down any exact and complete formula for bringing order out of this underbrush, but there are a few general rules.

1. Writers always use too damn many adverbs. On one page recently I found eleven modifying the verb ‘said’. ‘He said morosely, violently, eloquently, so on.’ Editorial theory should probably be that the writer who can’t make his context indicate the way his character is talking ought to be in another line of work. Anyway, it is impossible for a character to go through all these emotional states one after the other. Lon Chaney might be able to do it, but he is dead.

2. Word ‘said’ is O.K. Efforts to avoid repetition by inserting ‘grunted’, ‘snorted’, etc., are waste motion and offend the pure in heart....
...MUCH MORE

Today's modern blogger:
1937-Timely-Topcoat-Ad-POLO-player-horse-fans
Okay, 1937's.
At Saratoga.
Last seen in May's "Resiliance, Brittleness and Catastrophic Failure: Everything Is Fine, Until It Isn't".

"We’re Back: Russell 1000 Growth Finally Breaks Dot-Com Bubble High" (IWF)

It doesn't feel the same.
Which is a good thing. Onward and upward.

From Barron's Stocks to Watch:
This just in: The Russell 1000 Growth Index just hit an all-time high of 925.98. Now this isn’t just another all-time high, the way we’ve been getting them in the S&P 500 and the Dow Jones Industrial Average, which have hit multiple highs this year. This is a big deal.

The reason: The previous high in the Russell 1000 Growth Index was back in March 2000–right at the peak of the dot-com bubble. That means it’s taken nearly 14-and-a-half years for the index to finally scale those heights.
The Russell 1000 growth index is chock full of big tech companies like Apple (AAPL), Microsoft (MSFT), Verizon Communications (VZ) and Google (GOOG).The big difference now is that these types of stocks actually make oodles of money and trade at (more) reasonable valuations.

Those stocks are also big components in the Nasdaq 100 and Nasdaq Composite indexes–just about the only major U.S. indexes that have yet to hit their all-time high....MORE
IWF is the iShares ETF based on the index.

French Nude Models Walk the Picket Line

Clothed.
From The American Interest:
Nude protesters have become a fairly regular occurrence in recent months. But in France, people are now protesting by keeping their clothes on. French artists models are demanding state pensions, and refusing to disrobe until they are regarded in the same light as Renoir’s mistress, according to The Times:
Dozens staged a one-day stoppage in Paris, and said they may keep their clothes on again unless Aurélie Filippetti, the culture minister, opened negotiations over their status.

They want the recognition afforded to the great 19th-century models, such as Lise Tréhot, Renoir’s muse, or Victorine Meurent, who posed for Manet.

They also want to be classed as performance artists, and entitled to generous unemployment benefit between jobs, sick pay and state pensions....
 ...MORE

Sell Silver

Following up on Friday's "Lines on Charts: Silver Is Poised To Break Lower".
From Inside Futures, Friday Aug. 15:
Silver Futures--- Silver futures in the December contract are under pressure this Friday afternoon in New York trading lower by $.25 trading at 19.65 hitting an 8 week low as I’ve been recommending a short position in silver placing your stop above the 10 day high which currently stands at 20.35 around $.70 or $3,500 risk per contract at today’s price level as the commodity markets remain bearish as the U.S dollar hit a 6 month high against the Euro currency this week pushing commodities even lower.

In my opinion I do believe that the U.S dollar will continue higher against the Euro currency due to all the problems in Europe and the Ukraine and I don’t think those problems are going away anytime soon so continue to look at for higher prices in the U.S dollar which could pressure the precious metals especially silver prices as the next level of major support is around $19 an ounce. Silver futures are trading below their 20 and 100 day moving average telling you that the trend is lower as the chart structure is outstanding at the current time so continue to play this to the downside and sell any rallies making sure that you place the proper stop loss risking 2% of the account value on any given trade. TREND: LOWER –CHART STRUCTURE: EXCELLENT
September-$19.400 last, down 23.5cents.
Here's the action over the last couple weeks from FinViz:

Equities: The Short Term Prognosticator of the Day Award Goes To....

...this bit, written just before 11 EDT:
This is the third attempt to push through the ~4,030 level this morning. If it happens the upside would manifest very quickly.  
Chart forNASDAQ-100 (^NDX)
Sometimes you get lucky.
Next I'll explain why the bet on Harold at Hastings actually was the smart money.

CORRECTED--Elon Musk's SpaceX Is Raising Money At A Valuation Approaching $10B

Correction: "Whoa!: 'SpaceX Denies Funding and Valuation Rumors'".
Original post:
From TechCrunch:
Space Exploration Technologies, the commercial space transportation startup founded by Elon Musk with ambitions to land people on Mars, is raising investment that values the company somewhere south of $10 billion, TechCrunch has learned.

These new details are emerging while SpaceX, as the company is more commonly known, continues to make advances with its own spacecraft and rack up more agreements for future commercial and government launches. The company also potentially faces stiffer competition from other commercial firms that are looking to compete more aggressively in the new space race.

The latest capital infusion includes a large secondary investment, which appears to be somewhere in the region of $200 million. This confirms some of the details published in April this year by Quartz, which cited a source reporting that the company might be raising between $50 million and $200 million....MORE

Google’s 10 Zaniest Projects in the 10 Years Since the IPO (GOOG)

I am confident this is the first time we've ever used any variation of zany in a headline.
From recode:
Ten years ago today, Google Inc. went public in an offering that raised nearly $1.7 billion and valued the young Internet company at around $27 billion. The Mountain View, Calif., startup quickly put that money to work, transforming itself into much more than an online search company.

By the end of 2004, it had acquired the companies that would form Google Maps and Google Earth. It was already pushing beyond the confines of the Internet, scanning physical books to make them searchable, too. And the company launched Google.org, which, among many other projects, would seek to develop ultra-efficient vehicles, confront global poverty and analyze data to predict real-world events like flu outbreaks.

In 2006, Google picked up YouTube. In 2007, it announced Android. And in 2008, it introduced the Chrome browser.

Along the way, Google has continually expanded what online search meant, even as it pushed into areas further and further beyond its core business. In 2010, it launched Google X, which has plumbed the depths of science fiction for ideas ever since.

Here, then, is a list of 10 of the biggest, most ambitious or zaniest projects that Google has explored in its decade as a public company, most of which occurred since the launch of its secretive research division.

Self-driving cars: In late 2010, Google took the wraps off a secret effort to develop self-driving cars, aiming to turn that staple of futuristic films into a consumer reality. Specifically, the company revealed its autonomous vehicles — Toyota Prii equipped with lasers, sensors and computers — which had already logged thousands of miles along San Francisco Bay Area highways.
self-driving carThe company had hired several leading researchers to push the field forward, including Sebastian Thrun, who led the Stanford team that won the 2005 DARPA autonomous driving challenge. More recently, at Re/code’s Code conference in May, Google unveiled a new car built from the ground up to operate under robot control, eliminating the wheel, gas pedal and brake altogether.

Project Loon: Last summer, Google began conducting experimental trials of Project Loon in New Zealand, an effort to move more of the developing world onto the Internet through a series of connected balloons floating in the stratosphere.

As Google explained: “Loon balloons go where they’re needed by rising or descending into a layer of wind blowing in the desired direction of travel. People can connect to the balloon network using a special Internet antenna attached to their building. The signal bounces from this antenna up to the balloon network, and then down to the global Internet on Earth.”...MORE

Equities: Another 7% Higher on the Nasdaq 100 (NDX)

This is only a guess but it is as good as any, plus the summer-into-autumn color palette is nicely topical.
The hundo's up another 9.69 at 4,030.19.
This is the third attempt to push through the ~4,030 level this morning. If it happens the upside would manifest very quickly.
From Dragonfly Capital:
Seems like since the bottom in March of 2009 everyone, their neighbor, their barber, their Uber driver and their mother has been trying to call a top in the markets and an impending correction. What if everyone of them is wrong? The Nasdaq 100 gives a clue as to where it might go if it just keeps running. It is mot a prediction or a forecast but take a look.
ndx
A very simple AB=CD pattern, where the move higher before the pullback is repeated after it stabilizes and turns again higher, projects the current leg could go as high as 4300. That is almost another 7% higher. What do the momentum indicators say?...MORE
Here's Yahoo Finance on this morning's action:
NASDAQ-100 (^NDX)

"Harry Potter and the Neverending Promotions"

From the Reason Hit and Run link post:
J.K. Rowling issued another Harry Potter short story, again, as a tactic to drive traffic to the online Potter experience, Pottermore. Sounds like "Harry Potter and the Neverending Promotions," huh?
Also at Reason:
Americans Warming Up to the Idea of Bombing Iraq

The world has been Onionified.

BMO's Belski: "Bull market will charge higher for 15 more years"

No, no it won't.
If a bear market is defined by a 20% or greater peak to trough decline, I'm pretty sure we'll have one of those, which would, by definition, mark the end of the current bull market.
And we're bullish.
From Yahoo Finance:
Forget the naysayers! This bull market has another 15 years left in it. At least that’s what Brian Belski, chief market strategist at BMO Capital Markets, says while admitting “the believability of this market is very low.”

Belski’s call doesn’t mean we’re in for a decade and a half of smooth sailing. “Stocks are rarely linear for long. Near term we could be in for some bumpy trading...If we get some sort of a surprise correction to kind of cleanup...near-term complacency,” he says, “longer term we are in the camp that U.S. equities are the place to be. They are the most stable asset in the world.”

As such, Belski argues, “North america will drive growth going forward for the next five years at least.” He suggests that will give emerging markets in Europe the time they need to straighten out their issues....MORE

David Cay Johnston on Kinder Morgan’s Evolving Tax Strategy (KMI)

Not as gimlet-eyed as yesterday's "The "Kinder Morgan Is a House of Cards" Theory and the Pros and Cons of Going Short (KMI)".
In addition, the real concern with KMI is a dividend payout ratio north of 100%.

From TaxAnalysts via TaxProfBlog:
David Cay Johnston (Syracuse), Kinder Morgan’s Evolving Tax Strategy, 144 Tax Notes 881 (Aug. 18, 2014):
Johnston looks at Kinder Morgan’s recent announcement that it would be folding two master limited partnerships into a C corporation holding company.


Bárðarbunga--How to Short a Volcano (hint: this time it's probably not the airlines)

The alert level is still 'orange' 4 on a 5 scale.

Back in 2010 we posted "How to short a volcano" (What did Eyjafjallajökull screw up?) with an extensive list of areas and activities the volcano affected:
...(In addition to grounding European aviation for days on end and exhausting headline-writers’ supplies of volcano puns.)
The UK General Electionbetting on 2010 temperaturesSouthern California music festivalUK schoolgirls’ geography field tripthe Norwegian Government (iPad to the rescue)touring wrestlersBoston Marathon runnersthe London Book Fairhealth of petsfootball, ice hockey and runningPremier League refereesthe gilded progresses of celebs and pop starsJohn Cleese’s trip homefootball, cycling and runningPolish state funeraltransport of wounded soldiersDubai luxury hotel openingMorocco golf tournamentsexams, exotic foods and surgeryyet more celebs (Hollywood ‘paralized’, no less)Japan MotoGPthe international oil marketand even more celebsEuropean stocks and sharesKenyan flower growersKenyan vegetable growersmovie premieresBMW production in South Carolinaand still more celebs (superstar forced to take Irish Sea ferry)youth boxingequestrianismfootball (also boxing, running, tennis, motorcyle racing)organ transplantsGhana farming, war crimes trials, rose growing, car making, flowers for New York weddingstravel plans of dogs, horses, snakes, geckos, turtlesclassical concerts in San Diegoclassical concerts in Salt Lake Cityclassical concerts in New YorkTribeca Film FestivalMetallica tour (kings of heavy metal fight back, take bus)
...MORE

Here's the latest from Britains Channel 4:
Bároarbunga: why air travellers needn’t fear another 2010
Iceland’s Bárðarbunga volcano looks like it’s about to blow. But don’t worry, say volcanologists, the eruption probably won’t ruin anybody’s travel plans – it’s the wrong kind of ash.

When the Eyjafjallajokull volcano erupted in 2010 departure boards across Europe clattered to a halt for six days as an ash cloud grounded air traffic. More than 10 million travellers were affected with costs estimated at around a billon pounds.

But evidence from mapping the recent earthquakes near the volcano, which usually presage an eruption, suggest it’s not going to generate the kind of ash that will spread across Europe.

Rather than erupting from the centre of the volcano, magma appears to be heading for two separate areas to the side of Bárðarbunga – Iceland’s second highest mountain....MORE

Climateer Line of the Day: How Accounting Standards Have Changed Edition

From Going Concern:
...In ancient Athens, accounting was seen as connected to political accountability. From the beginning, a complex system of bookkeeping and public auditing was at the heart of democratic government. The Athenian treasury was considered sacred and kept at Delos under the watchful eyes on its treasurers.
Humble citizens and slaves were educated and employed as bookkeepers. For the most part, Athenians preferred public slaves as comptrollers and auditors because they could be tortured on the rack and freemen could not....
...MORE

UBS on Billionaire Family Office Investing

From Barron's Penta:
Billionaires Invest Differently
What are the world’s billionaires investing in these days? UBS and Campden Wealth recently conducted a survey analyzing the portfolios of more than 100 billionaire family offices spread across Europe, Asia and the U.S. The study captured a few key differences: U.S. investors have a higher share of their wealth in equities and developed market fixed income. Asian investor’s keep 3% of their wealth in “wine, art and watches” and have a relatively small exposure to hedge funds and private equity. Europeans, meanwhile, hold 21% of their wealth in real estate, roughly the same as they have in stocks.

These regional differences aside, the research found that the super wealthy are loading their portfolios with between 45% and 62% in alternatives, while keeping 10% to 15% in cash (see table below). Simon Smiles is UBS’ chief investment officer for clients with 50 million Swiss francs ($55 million) and manages some 447 billion Swiss francs. He says his wealthiest clients are underweight equities and recommends greater exposure to the U.S. and Canadian stock markets in particular.

“Today, conversations about what is risky and what is less risky are radically different than in the past,” he says. They are, in fact, overweight cash, still wary of equities after weathering the 2008 collapse, and don’t like what the likelihood of rising interest rates will do to 10-plus year Treasury bonds. This is not an entirely new discovery. For more on these themes, see our March Penta cover story, “Treasure Hunt.”)

But, more interestingly, Smiles believes a different perception of time is also a big factor in their unusual portfolio decisions. UBS Wealth Management’s smaller client accounts are comfortable planning for 6-months of immediate cash-flow needs, Smiles says, while his wealthiest clients take a “multi-decade approach” to meeting their financial needs. The conversation is radically different, in other words, with the super wealthy hyper-focused on wealth preservation over multiple generations....MORE
Fun fact from 2011: "Bill Gates’ Children Mock Him With ‘Billionaire’ Song"

Monday, August 18, 2014

Wait! Bill Ackman Has Something Else To Say!

From DealBreaker:
Between suing the government for taking all of the profits from two companies that it began taking all of the profits from more than a year before he bought 10% of each of them, and Friday morning, the Pershing Square Capital Management chief had another brilliant idea, and decided to sue the government again.
Pershing Square’s second suit seeks an injunction stopping the so-called net-worth “sweeps,” a declaratory judgment that the revised bailout terms and the sweeps are illegal, and the unwinding of the sweeps or “other equitable and ancillary relief.”...
...MORE

Pope Francis Endorses Use of Force Against ISIS

There were rumors that this was the thinking at very high levels of the Vatican a week ago, I'll see if we have a link.
From the Associated Press:
ABOARD THE PAPAL PLANE (AP) — Pope Francis on Monday endorsed the use of force to stop Islamic militants from attacking religious minorities in Iraq but said the international community — and not just one country — should decide how to intervene.

Francis also said he and his advisers were considering whether he might go to northern Iraq himself to show solidarity with persecuted Christians. But he said he was holding off for now on a decision.

In other comments to journalists returning from South Korea, Francis confirmed he hoped to travel to the United States in September 2015 for a possible three-city tour: to attend a family rally in Philadelphia and to address Congress in Washington and the United Nations in New York. He said a Mexico stop on that trip was possible but not decided yet. He also said he might make one-day visit to Spain next year....MORE
Il Papa's security people can't be too thrilled about a trip to Mosul but see also:
Heads Up For The Swiss Guards: ISIS Says They're Coming to Rome

Iceland Volcano Bárðarbunga set to erupt (and it's bigger than Eyjafjallajökull)

Bárðarbunga Dude.

Here's the BBC's Guide to Icelandic Pronunciation. Pity the poor newsreaders.
From Ice News:
Intense seismic activity in Iceland’s Bárdarbunga volcano
 Seismic activity in Bárðarbunga, a large sub-glacial volcano in Iceland, has increased. A seismic swarm has been ongoing since 3AM this morning, and near continuous earthquakes have been occurring ever since.
The depths of earthquakes in the present swarm are in the upper crust and their magnitudes are mainly around 1.5; a few earthquakes are of magnitude greater than ML3. According to geologists, there are no signs of magma moving to the surface presently. The seismic activity abruptly started on August 16th and is still ongoing.

According to the Icelandic Met Office, an earthquake of magnitude 3.8 occurred at 02:37:19 this morning (18th August) about 2.4 KM NNE of Kistufell in northwestern part of Vatnajökull. Reports are indicating that it was felt in Akureyri, N-Iceland. This is the most intense earthquake swarm in this area for years; measurements also indicate magma movement.
In historic times there have been large eruptions every 250–600 years. 
Þjórsá Lava is the largest Holocene lava flow on Earth. It originated from Bárðarbunga about 8.500 years ago, with a total volume of more than 21 cubic kilometers with some estimates stating as high as 30 cubic kilometers. The lava field covers approximately 950 square kilometers. The largest eruption from Bárðarbunga had a VEI of 6; many smaller-sized eruptions have been recorded in the past 10.000 years....MORE

Corrected--Fun Fact: After New York, What State Has the Most Goldman Sachs Employees? (GS)

Correction below.
Original post:
As most of you are well aware, it isn't tiny Delaware. Or Jersey.
From Real Time Economics:
The employment boom in the West isn’t confined to energy-rich North Dakota.

Utah has emerged this year as a job creation leader, according to Labor Department data released Monday. The state’s July unemployment rate of 3.6% ranks only behind North Dakota’s minuscule 2.8%. Utah payrolls have grown by 2.5% over the past six months, also second-best in the country.

But unlike North Dakota’s oil-fueled expansion, Utah’s economic resurgence reflects broad-based gains, said University of Utah economist Natalie Gochnour.

While energy is a growing field in the state, the tourism and technology sectors have been strong and financial services is expanding, she said. Salt Lake City has the highest number of Goldman Sachs employees in North America, after New York.

Utah was “hit harder during the downturn, but it’s recovered more quickly the rest of the country,” Ms. Gochnour said. She also serves a chief economist for the Salt Lake Chamber.

In the past six months—a time when the country as a whole added better than 200,000 jobs each month—Utah added a total of 33,000 jobs to payrolls. That outpaces much larger states such as Virginia, New Jersey and Illinois....MORE
Correction--I am told that 30 Hudson Street, Jersey City, harbors ~4,000 Goldmanites which if correct is larger than the Salt Lake City crew numbering ~2000. We apologize for the error.
However if one considers the New York-New Jersey connurbation to be one unit, Salt Lake City becomes Goldman's fourth largest operation worldwide:
NYC-NJ
London
Bangalore
Salt Lake City

I should not have departed the chosen meter.

McKinsey and the Financial Times Offer $25,000 for Best Book Proposal

Turnabout being fair play, I reversed the order of the partners names from that used in our Aug. 7 post on the other component of the jv: "The Financial Times and McKinsey: Best Business Books of the Year".

From TaxProfBlog:

The Bracken Bower Prize:
The Financial Times and McKinsey & Company, organisers of the Business Book of the Year Award, want to encourage young authors to tackle emerging business themes. They hope to unearth new talent and encourage writers to research ideas that could fill future business books of the year. A prize of £15,000 [$25,000] will be given for the best book proposal. ...MORE

"Saudi prince's motorcade held up at gunpoint in Paris"

From the Guardian:

French detectives investigating whether gunmen wanted money or sensitive diplomatic documents

Saudi embassy in Paris
The Saudi embassy in Paris. Police say there were no injuries in the attack on the convoy. 
Photograph: Remy De La Mauviniere/AP
French detectives are investigating whether a group of heavily armed gunmen who attacked a convoy of vehicles carrying a Saudi prince and his entourage in the north of Paris wanted money or important diplomatic documents.

The attackers, who police said were clearly well informed, struck on Sunday evening after the motorcade of a dozen vehicles left the luxurious George V hotel on the Champs Elysées and headed to Le Bourget airport, nine miles (15km) north of the French capital.

As the convoy arrived at Porte de la Chapelle, which leads to the péripherique ring road, the attackers – who were travelling in two BMWs without number plates – forced the Saudis' cars to stop, and went straight to one of the vehicles, a Mercedes people carrier.

The robbers, said to number between five and eight, seized the Mercedes and its three occupants – as well as €250,000 and what Le Parisien newspaper described as sensitive documents.

Soon afterwards the robbers released the hostages and abandoned the vehicle, which was found an hour later in Saint-Mesmes, a village in the Ile-de-France region north-east of Paris, along with one of the BMWs. Both vehicles were burnt out.

Some reports suggested the robbers were carrying handguns, others that they were armed with Kalashnikovs, but detectives said no shots were fired and no one in the convoy was hurt. Two €500 notes, documents in Arabic and some medical drugs were said to have been found near the wreckage....MORE

The "Kinder Morgan Is a House of Cards" Theory and the Pros and Cons of Going Short (KMI)

Companies that engage in great amounts of financial engineering are always worth looking at as potential shorts. A lot of skullduggery can occur when the razzamatazz really gets going.

This week both Barron's which has been skeptical for a while, and FT Alphaville which has, until today, been neutral take a look at all the moving parts.

Regarding a short on KMI, I hate paying dividends on short positions.
Hate it, hate it, hate it.
But I might be tempted in this case. And the rate of ascent on the stock is definitely rolling over.

First up, FT Alphaville:
Kinder Morgan, MLPs and the sell case
The $44bn self-acquisition of Kinder Morgan has been heralded by some as a great deal for shareholders.
But is it? Is it really? At least for the ordinary investors?

We’ve already wondered about the motivation for the deal.

Among our initial thoughts: Kinder Morgan MLP units trading under the KMP ticker had got expensive due to the heavy promotion of MLP structures as a safe-ish and yieldy investment at a time of low interest rates.
But we now think there may be more to it than that.

First, there’s the Master Limited Partnership (MLP) structure itself, which was pioneered and popularised for use in the energy infrastructure sector by Kinder Morgan’s chief executive, Richard Kinder, in the 1990s. It’s certainly not your average run-of-the mill equity instrument.

Instead of owning shares in energy companies, investors in MLPs receive units that entitle them to the cash-flow from partnership-owned assets. They’re tax efficient because depreciation on the assets becomes tax deductible on a partner level.

To us, MLPs evoke the Production Sharing Agreements (PSAs) used by oil-rich foreign countries to incentivise private investment by non-residents.

Under these structures, if the investor-led projects strike oil and achieve cash-flow, their capital in the form of “cost oil” is returned to them before any profit share is subjected to tax. The host country, meanwhile, takes a royalty payment from the beginning (a share of the flow) and is provided with an extremely low cost of capital — because all the risk is borne by the foreign investors doing the oil hunting. It also retains the right to tax the foreign entity’s remaining “profit oil” generated by the project.

Foreign investors don’t tend to mind the structure because asset depletion or depreciation becomes the host country’s problem while the ongoing cash-flow remains theirs. Indeed, once their capital is returned they can simply transfer it into further cash-flow generating investments while retaining their rights to the now (taxable) cash-flow from depreciating assets.

But with MLPs the depletion and depreciation remains a real cost which must be capital accounted. While it is true that the charge is tax deductible, it must be remembered, taxes are never avoided just deferred until the units are sold.

Some independent analysts, such as Kurt Wulff, have been critical of the MLP structure for years, claiming it only works for shareholders during the growth phases of a partnership.

Due to capital depreciation costs (so-called depreciation, depletion and amortisation, known as DD&A) the investor can in the long run, he believes, end up paying the company in question more (via the cheapness of the capital provided) than what they defer in tax over the period.

That’s considered okay in the MLP marketing spiel, however, because a tax deferred is a tax not paid.
Furthermore, as Kevin Kaiser, an analyst at Hedgeye, explains to us investors are simply encouraged to never sell their units....MUCH MORE
And from Barron's:
Tax Breaks -- For Whom?
Two big deals in the world of tax-advantaged income investments -- MLPs and REITs -- signal that change is afoot. But don't be fooled by corporate maneuvering: These deals are tax-advantaged for the companies themselves.

Two tax-advantaged income investments have gained attention by way of two unusual transactions. One raises questions about the sustainability of its growing asset class, while the other expands its asset class' reach.
Last week, Kinder Morgan (ticker: KMI) said it will unify its energy empire within a single company, abandoning the master-limited-partnership structure it helped popularize. Kinder will absorb its subsidiaries -- Kinder Morgan Management (KMR), El Paso Pipeline Partners (EPB), and Kinder Morgan Energy Partners (KMP), the latter two both MLPs -- into a traditional C corporation structure under the KMI ticker. (See related story, "Treading Gently With Kinder Morgan.")

In a common MLP setup, a parent company, known as the general partner, helps run the underlying limited partnership, which typically owns pipelines that transport natural gas and other fuels. In return, the general partner receives a growing share of the cash stream the MLP produces. But Kinder Morgan Inc. got to the point where it was siphoning off 45% of the cash from its underlying MLPs, which still had to pay investors and fund projects. 

These payments to the general partner, known as incentive distribution rights, encourage growth in an MLP's early years, according to Brian Watson, director of MLP research at Oppenheimer SteelPath MLP funds, but over time, they can become a burden. Kinder attained a size and longevity that tested the model. 

No other MLP pays more than 34% of its distributable cash flow to a general partner; Watson would like to see MLPs keep that to 25% or less. "Solving this issue is something that's been talked about for years," he says. "At some point, [Kinder] crossed a line where it was no longer just an incentive mechanism but instead became a drag on performance."...MORE
This isn't the first time Barron's declined to wear the cheerleader uniform.
Back in February they ran a cover story:
Kinder Morgan: Trouble in the Pipelines?
The $500 billion master-limited-partnership sector is the sausage maker of the investment world. Buyers love the yields -- now averaging about 6% -- but many know little about how the yields are generated. And Kinder Morgan, the country's largest energy-infrastructure company, may be the biggest sausage maker of them all. The publicly traded companies in the Kinder Morgan family own or operate 80,000 miles of pipelines carrying natural gas and petroleum products, and 180 terminals that store oil and other commodities. The company also produces oil from mature fields in Texas. 

In all, the Kinder Morgan complex -- Kinder Morgan Energy Partners (ticker: KMP), Kinder Morgan Management (KMR), Kinder Morgan Inc. (KMI), and El Paso Pipeline Partners (EPB) -- has an enterprise value (market value plus net debt) of over $100 billion, ranking it third behind only ExxonMobil (XOM) and Chevron (CVX) in the entire U.S. energy business. Last year, the company distributed more than $4 billion to public shareholders. 

The bull case for the Kinder Morgan companies is that they offer a high-yielding way to participate in the booming U.S. energy infrastructure build-out. Bulls invoke the toll-road analogy, saying Kinder Morgan and its peers generate the bulk of their revenues from stable, government-regulated returns on their pipeline assets.
With a motto of "run by shareholders, for shareholders," Kinder Morgan has generated superior returns since 1997, when CEO Richard Kinder took over. Those gains could be difficult to sustain.

The largest piece of the Kinder Morgan complex, Kinder Morgan Energy Partners, is a master limited partnership that is widely owned by retail investors. It trades for about $79 and yields 6.9%. Its twin, Kinder Morgan Management, which is structured as a corporation for tax purposes, pays a comparable dividend, but in stock not cash. Kinder Morgan Inc. is the general partner, which controls the Kinder Morgan MLP and El Paso Pipeline Partners. It's headed by Rich Kinder, whose 23% stake is worth $8.1 billion. It trades at about $33 and yields 4.9%....MORE
After the Barron's piece a Seeking Alpha contributor called his post "Kinder Morgan Energy Partners: Still Not A House Of Cards" which defense I thought was pretty funny and from which I purloined the headline for our post.

For those interested here is the KMI response to the February Barron's story, (6 page PDF)

All that being said the stock is showing its first real weakness day since the announcement:

On Aug. 8 the stock closed at $36.12, opened the following Monday at $42.41, shook out a couple hundred million shares over the course of that week and closed Friday at $41.43. Today it is off 1% at $41.00 on a 1% up day for the larger market.

Chart forKinder Morgan, Inc. (KMI)

How to Capture Alpha through Beta

Towers Watson has made a bit of a cottage industry out of this stuff.*
From Chief Investment Officer:
Alpha and skill are not synonymous, and what was once alpha can be acquired as beta, according to Towers Watson.

Considering risk factors and extending beta exposures to nontraditional asset classes could result in investors capturing alpha, Towers Watson has said.

The firm argued investors could tap into the space between alpha and beta to secure returns normally acquired by active management.

“Monitoring and selection of betas is very important—a form of alpha in itself,” –Towers Watson.
“The terms ‘alpha’ and ‘skill’ are often used synonymously, and investors have often outsourced alpha generation to specialist fund managers,” Towers Watson said. “However, we think there is an opportunity for investors to capture new sources of returns—or beta—by applying governance, or skill in a broader sense.”

According to the report, investors should adopt a broader framework for beta by using implementation strategies—such as carry, momentum, and value—and by extending beta to diversifying asset classes the likes of currency, commodities, and volatility.

These alternative betas feature great diversification capabilities, especially to traditional asset classes, displaying low correlations to equity and credit markets, the report said.

A typical alternative beta portfolio would consist of both long and short strategies, resulting in low exposures to traditional markets, Towers Watson said. It would also be scaled for risk and diversity and have low management fees.

Despite the advantages of this so-called "smart beta", the firm said it also required additional up-front governance and investor skill....MORE
*One of Towers Watson's more recent papers, July 29, 2014:
Into a New Dimension
An Alternative View of Smart Beta