Friday, September 30, 2011

Spitballing a Peak in the Commodity Cycle

Just thinking out loud here.
Back on May 5 we posted "Commodities: Did Jeremy Grantham's 'Paradigm Shift' Letter Call the Intermediate-term Top" just after one of the tops in commodities:
Remember: A paradigm is only worth twenty cents.
Like a lot of blogs we relayed Mr. Grantham's thinking.
Here's the Jeffries Global Commodity ETF chart via Finviz:

I'll be back with more. In the meantime here's the April 26 post that linked to FT Alphaville's Grantham story:
The End of Cheap Commodities (or not)
Later that day:
Commodities Have Reached a Permanantly High Plateau* (or not)
April 29:
Commodity Prices tend to be Mean-Reverting (cotton)
May 3:
Commodities: "The Case for Human Ingenuity"

You can probably guess that I tend toward the optimistic.
Today Market Anthropology extends the "Broad sunlit uplands" theme:

...I believe we are now on the backside of one of, if not the greatest - commodity super cycles the world economy has had to absorb. The ramifications of this towards the global economy will be far reaching - from the lower input costs in manufacturing and shipping goods, to the considerable benefits of cheaper energy to the average consumer. I spoke tangentially to these points in my note, the Usual Suspects in August. 
- Our economy through tremendous gains in productivity (and accounting) has transitioned to profitability at such a historically high petroleum and commodity cost multiplier, that by dialing energy and commodity prices lower here through the relative tightening (no additional QE) of monetary policy could in fact provide the most comprehensive stimulus to the economy and the consumer - just when the Fed was perceived to have no additional rounds left in the chamber. To think that even five years ago before the financial crisis hit, that the US economy would be able to maintain the degree of profitability it has exhibited today (with over 9% unemployment, a 12% output gap and until last week - $100 oil) would have been perceived as pure academic fiction. No economist in their right mind would have believed that these economic conditions could have produce such results. -
Certainly, it will not come without the perceived negative effects to those emerging economies that have up until this year, led the global markets and have benefited disproportionately from the booming commodity trade. However, that has historically always been the case with emerging markets. Those that have managed the profit windfalls responsibly, and have found a foothold on the global stage - will transition to a more developed economy. 

But for the sake of argument and clarity, I created the chart below from a historic chart of the DJIA and the excellent long term commodity chart created by Hackett Financial. I estimated the retracement move since the chart was created based on the CRB index. I did not scale the components to each other for the basic reason that its utility is to simply convey what directional relationships between the two asset classes develop after the commodity cycle peaks. 

As evident in the last two occasions where the commodity cycle has peaked, the stock market has initially followed commodities lower for only a spell - before breaking out of the long term trading range it was confined to. This makes rational sense, in that investment capital that was riding the commodity boom will eventually make its way over to the market that had been underperforming on a relative basis.  

"Poland vows to veto any EU law on shale gas fracking"

I guess they're more afraid of Russia than they are of France or German Greens.
From iol's Business Report:
POLAND would veto any EU legislation that threatened its sovereignty in energy policy, Maciej Olex-Szczytowski, an adviser to the Polish foreign minister on economics and business, said yesterday.
“We’re going to veto any attempt of interference in our sovereignty in the sphere of energy policy,” Olex-Szczytowski said at a conference in Krakow when asked about a potential initiative to pass EU legislation regulating shale-gas exploration. 

Poland, which is seeking to reduce its reliance on Russian gas, might hold enough fuel trapped in shale to meet its needs for 300 years, the US Department of Energy said in April. 

France, like Poland a member of the EU, in July became the first country in the world to ban hydraulic fracturing – whereby water, sand and chemicals are pumped into rock to release trapped fuel – amid concern it may contaminate water supplies....MORE

Tricks of the Trade: "New York Times Crossword Puzzle Sends Coded Messages Of Support To Jeff Gundlach "

Lifted in toto from DealBreaker:
But, of course, only on Fridays and Saturdays:

Little things gave me faith. I remember doing the New York Times crossword one Friday in March. I kept stumbling on a three-letter word for “significant hit.” “RBI” didn’t work. Then I realized it was “DBL”—a double. At that moment, I felt DoubleLine would do O.K.
Jeffrey Gundlach on Starting DoubleLine [BW]
Tags: , , , ,

Oh she is good.

Solar Fire Sale: "Intel-backed SpectraWatt sold! . . . for $4.9M" (INTC)

As the best stock picker I've ever met said upon seeing this chart in 1998:
Chart forAltria Group Inc. (MO)

Splits: Jun 3, 1974 [2:1], Jun 1, 1979 [2:1], Apr 11, 1986 [2:1], Oct 11, 1989 [4:1], Apr 11, 1997 [3:1]

A trend is emerging.
(it's up 3% today)

From earth2tech:
After years of incubation and at least $91.4 million of private capital from investors including Intel, all of the capital equipment of silicon solar cell maker SpectraWatt has been sold to Canadian Solar for about $4.95 million. The sale still needs final approval from the bankruptcy court, which is scheduled to do so on Oct. 6. The auctioneer, Heritage Global Partners, also plans to auction off bankrupt solar panel maker Solyndra.
The sale is a dismal end for SpectraWatt, which was incubated inside Intel before being spun off in 2008 with $50 million in capital from Intel, Goldman Sachs’ Cogentrix Energy, PCG Clean Energy and
Technology Fund, and Solon....MORE

Life is Hard When You Can't Choose The Mortgages that Go Into the MBS: "John Paulson Lost Another 6% In September "

From NetNet:
You can end your speculation.
John Paulson lost another 6% in September according to Bloomberg.
There's been tons of speculation about how well he did in August, especially considering the carnage in the gold miners, which he is heavily invested in. The Advantage Fund is down 28% for the year, according to the report. It's his Advantage Plus Fund that's much worse, having already lost over 40% going into this month.
This story originally appeared on Business Insider

"CITI Vix Triangle Hunt" (VXX; TVIX)

The VIX is up 2.17 (5.59%) to 41.081.
From Slope of Hope:

I received an interesting email last night which was a forwarded warning from CITI to clients warning of a triangle on the Vix suggesting that the Vix might spike to new high very soon while equities fell hard accordingly:
Obviously this was potentially very interesting, and I had a look at the Vix chart. I could see no triangle. However I did see a rectangle and suspect that the setup seen by chartists at CITI was lost in translation as they tried to explain to to non-chartists there. I'll show the rectangle on the 60min, and the target on an upside breakout would be in the 55.50 area, which would indeed be a major move.
The rectangle is a bottoming rectangle, which has only a 45% chance of breaking up, but with an 80% chance on making target on an upside break. Under the current circumstances though an upside breakout looks (from a TA perspective) a lot more likely than a downside breakout, and I've noticed in the past that these rectangle bottoms tend to break up if the decline into the rectangle was small, as in this case:

It's the last day of the month today of course, and the SPX would need to rally to 1206 to close over the monthly 20SMA. That seems unlikely. I showed the chart for this yesterday and you can see that here. This has important implications as in the last two bear markets after the monthly close below the 20SMA, that moving average was an impenetrable ceiling until the start of the next bull market, being retested only once in each of the last two bear markets before further declines....MORE

What Bernanke Hath Wraught: "Hello, neo-stagflation"

I've had some folks tell me it is a deliberate attempt to cause the middle and working classes so much pain, a type of Cloward-Piven strategy but focused a couple rungs up the socio-economic ladder, that they will be amenable to massive societal change.

I don't know about that, the powers that be don't invite me to their meetings and it does sound a bit tin foil hat-ish.
From the Globe and Mail:

Stagflation: Scourge of the ’70s stalks us still 
As we teeter toward what could be the third U.S. recession in a decade, experts can’t help but sift through economic history to look for precedents. The eye is immediately drawn to the last decade of the recession trifecta – the 1970s.

That lost decade for the economy and the stock market was marked by a set of conditions so glaring that they popularized a previously obscure economic term: stagflation.

You’d think stagflation – the combination of high inflation and stagnant economic growth – would be of little help in understanding our current decade. After all, inflation rates in North America are running at a little over 3 per cent, compared with about 13 per cent at the end of the 1970s.

But veteran portfolio manager Don Coxe thinks there’s a new kind of stagflation. It may not be as dramatic as the stagflation that crippled the 1970s, but it may help explain the stalled economic and equity-market cycle.

Hello, neo-stagflation
Mr. Coxe, chairman of Coxe Advisors LLC and an adviser to BMO Nesbitt Burns, argues that while overall consumer price inflation has been fairly tame so far by historical standards, a form of “neo-stagflation” has emerged. Indeed, this trend is visible in looking at economic growth versus the inflation rate over the past several years, and has accelerated this year – inflation is clearly climbing while economic growth is stagnant.
This neo-stagflation is characterized by rising prices for food, fuel and metals – which were also key drivers in the 1970s stagflationary spiral.

“An OECD economic cycle in which prices of foods, fuels and precious metals rise far more strongly than prices of manufactured goods – or workers’ wages – is inherently stagflationary,” he wrote in a recent report. “A greater and greater share of total consumer spending goes to the commodity producers who own the farmland, the mines or the oil wells....MORE
HT: Cryptogon

MORE Société Générale's Albert Edwards:"The S&P at 400 is almost inevitable" (Sept. 30, 2011)

Following up on yesterday's "Société Générale's Albert Edwards: "S&P Fall to 400 Is ‘Inevitable’" (Sept. 29, 2011)" FT Alphaville adds some color, charts:
After his brief experiment with technical analysis (well, Killer Waves) uber bear Albert Edwards returns to more familiar ground in his latest Global Strategy Weekly.
Jeremy Grantham of GMO says this is “no market for young men”. Maybe now I am over 50 it is my time! Yet my forecast of the S&P bottoming at 400 is still met with utter derision. I have been underweight global equities since the end of 1996 and overweight government bonds. Meanwhile US 10y bond yields have fallen from 7% to 1¾%, a hair’s breadth from our longstanding 1½% target. Similarly, in my very humble opinion, S&P at 400 is almost inevitable.
Edwards says those who take reassurance that the current 12-month forward S&P 500 PE of 10.5 times is cheap are fools, because earnings have peaked…

… and a third post bubble-recession is looming as are single digit PE’s....MORE
Always, always remember that the key characteristic of bear markets is compression of the P/E ratio as investors get ground down by the sideways/down action and quit bidding up for earnings. Along the way there will be at least two economic contractions that reduce earnings cyclically but the key is the multiple contraction.
The 1966-1982 bear resulted in the S&P 500 trading at 7x.

From "This is What a Bear Market Looks Like Folks (now with Voodoo Beach Bunnies)":
...This is a repost/mashup of a couple points that bear [good one -ed] repeating. No bull [lame-o -ed]

...Secular bear markets are characterized first by the initial decline and then by P/E multiple contraction.
During the last secular bear, 1966-1982, the cyclical bear of '73-'74 had a S&P 500 trailing four quarters P/E of 6.97 for the quarter ending 9/30/74 while the '80-'82 cyclical had a P/E low of 6.68 for the quarter ended 3/31/80. One of my favorite Warren Buffett quotes:
December 31, 1964: DJIA 874.12
December 31, 1981: DJIA 875.00
“Now I’m known as a long-term investor and a patient guy, but that is not my idea of a big move.”
-Warren Buffett
That’s a secular bear market....MORE, including charts.

Thursday, September 29, 2011

"2011 Ig Nobel Ceremony webcast tonight!"

Last year Nobel prize co-winner in physics, Andre Geim became the first person in history to win both of the prestigious prizes!
Let's see what other brainiacs tonight's award ceremony introduces.
From Improbable Research:
Tonight’s the 21st First Annual Ig Nobel Prize Ceremony. 1200 people will have the privilege of watching it live, in-person at Sanders Theatre, Harvard University.
Many more will have the opportunity to watch it live on the internet.

The webcast will be available here on, at the Improbable Research YouTube channel and at finer media outposts around the world and across the World Wide Web.

One of our technology partners, Elemental Technologies, will be hosting the webcast on their site.
Among the other websites hosting the webcast are such geeky luminaries as io9, BoingBoing, Scientific American, New Scientist, Central Science, Forest of Thoughts, and QI (Quite Interesting).

If you prefer a more traditional media experience, you may watch the webcast at sites like The Guardian, MSNBC, Fox News, The Huffington Post, CBC, ABC (Australia), Nashua Telegraph, The Chronicle of Higher Education, and Metro Newspaper.

If your preferences tend towards the non-English, you may enjoy the webcast at such sites as Wyborcza (Poland), Veja (Brazil), Ansa (Italy), Publico (Portugal), Clarin (Argentina), Wetenschap24 (Netherlands), and UOL (Brazil).

The broadcast will begin at 7:30 PM (US Eastern Time) on September 29th, 2011. It will last between 90 minutes and two hours.
Andre Geim First in History to Win Both the Nobel and the IgNobel Prizes
The folks at Improbable Research (on blogroll at left) must be saying "We're so proud".
They recognized Mr. Geim's genius back in 2000 for his pioneering work in in the field of frog levitataion.
The awards celebrate achievements that "cannot or should not be reproduced."
Here is the ref. for other scholars who wish to follow his path:

Andre Geim of the University of Nijmegen (the Netherlands) and Sir Michael Berry of Bristol University (UK), for using magnets to levitate a frog. [REFERENCE: "Of Flying Frogs and Levitrons" by M.V. Berry and A.K. Geim, European Journal of Physics, v. 18, 1997, p. 307-13.] 
Radboud University Nijmegen's High Field Magnet Laboratory devotes a page of their website to the subject... 
The 2010 Nobel prizes: Physics--Graphene Researchers Geim and Novoselov Win
Unlike the Peace Prize, you have to actually do something to win this one.
Materials science, yeah baby!... interviews Physics Laureate Geim about his Ig Nobel

Also at improbable Research:
Scrotal cosmetic beagle implants

If you were tasked with implanting silicone gel testicular prostheses in a beagle dog, which would be the more effective procedure, “under the tunica albuginea” or “under the tunica vaginalis”?...

“One of the most coveted prizes in science”
“Showered with paper airplanes, garlanded by admiring Nobel laureates, some of the world’s quirkiest scientists will be honoured at a sellout ceremony at Harvard University todayThe 21st annual Ig Nobel Prizes, conferred by the Annals of Improbable Research (AIR), have become one of the most coveted prizes in science. Bringing neither personal riches nor offers of future funding, the Ig Nobels do bestow a heavy dollop of cool on their winners who, collectively, seem to put the fizz in physics and the giggles in gigabytes.”
—So writes Victoria Lambert in The Daily Telegraph.
Meanwhile, in Italy:
Prima ridere e poi pensare,”  says La Repubblica.
And many more.
Also on Climateer Investing:
"Largest Group Of Nobel Laureates To Remove A Sword From Someone's Throat"
No, this isn't climate science. From THE UNIVERSAL RECORD DATABASE:
Largest Group Of Nobel Laureates To Remove A Sword From Someone's Throat

1 2 3 4 Next >
On October 1, 2009, during the 19th First Annual Ig Nobel Prize Ceremony in Cambridge, Massachusetts, eight Nobel Prize Laureates removed a 22-inch solid steel sword from Ig Nobel Prize Laureate sword swallower Dan Meyer's throat.
The Nobel Laureates involved:
Rich Roberts
- Nobel Prize in Physiology/Medicine, 1993
Wolfgang Ketterle
- Nobel Prize in Physics, 2001
Dudley Herschbach
- Nobel Prize in Chemistry, 1986
Paul Krugman
- Nobel Prize in Economics, 2008
Roy Glauber
- Nobel Prize in Physics, 2005
Frank Wilczek
- Nobel Prize in Physics, 2004
Martin Chalfie
- Nobel Prize in Chemistry, 2008
William Lipscomb
- Nobel Prize in Chemistry, 1976

- sword swallower must be a legitimate sword swallower officially verified and recognized by the Sword Swallowers Association International
- sword must be a solid steel non-retractable sword with a blade at least 15 inches in length
- Nobel Laureates must be recognized bonafide Nobel Laureates who have actually been awarded an official Nobel Prize
Click the pics to see the action.
HT: Improbable Research who stage the Ig® Nobels,last year's theme was RISK:
...(A full report, with action photos, appears in the Nov/Dec 2009 issue of the Annals of Improbable Research. Click here to see details and video of last year's (2008) ceremony, here to see the Improbable Research special issue about that ceremony. And for a journalist's view of the ceremony, read Steve Nadis's firsthand account.)

WEBCAST: After several exciting glitches, VIDEO of the ceremony is now online, in four parts:
Part 1: Pre-show Risk Cabaret Concert by The Penny-wise Guys, and the very, very beginning of the ceremony.
Part 2: Lots of introductions. Several past winners return. Benoit Mandelbrot's keynote address....MORE

Uh oh: "Farm profits have entered 'new dimension'" MOS; POT: AGU; CF)

That sounds suspiciously similar to "A permanently high plateau".
From Agrimoney:
The prospect of renewed strength in crop prices is leading US farmers' fortunes "into a new dimension", boosting the case for fertilizer industry shares, UBS said, as it lifted to "buy" its rating on stock in potash group K+S.
US farmers' margins – defined by revenues minus the cost of cash items such as fertilizer and seed – look set in 2011-12 to "dwarf" those of the last peak in agricultural commodities, three years ago.
Soybean and wheat farmers look set for margins double the recent average, and corn growers three times as much.
Cotton farmers' margins, at an estimated $394 per acre, are expected to come in at more than 20 times the $15 an acre the average achieved between 2002-03 and 2008-09.
"Consideration of the corn cash margin per acre chart above indicates that farmer profitability has entered a new dimension with strong pricing this year," UBS said.
'Potential consolidation targets'
Farm wealth was boosting prospects for fertilizer groups too, at a time of "tight" nitrogen and phosphate supplies and a "bullish" potash market, boosting pricing power.
"Agricultural market fundamentals remain strong with continued upside to fertilizer prices to spring 2012," UBS said.
Potash prices were seeing a "strong resurgence… clearly driven by the strength of end agricultural markets".
For share investors, the nutrients sector had the added attraction of possible takeovers, and the payment of acquisition premiums.
"Fertilizer names remain attractive as potential consolidation targets," the bank said, adding that the sector "continues its concentration exercise to maximise economies of scale"....MORE

"Leaked World Bank report confirms carbon market collapse" and a Bit-o-fraud

Well duh.*
From Redd-Monitor:

In a recent draft report, the World Bank writes that “The value of transactions in the primary CDM market declined sharply in 2009 and further in 2010 … amid chronic uncertainties about future mitigation targets and market mechanisms after 2012.”

The report, titled, “Mobilizing Climate Finance”, was prepared for the G20 meetings in November 2011. According to John Vidal, writing in The Guardian, the draft “is likely to provide a template for action in the UN climate talks that resume in Panama next week, in preparation for a major meeting of 194 countries in Durban in November.” The report can be downloaded here (pdf file 1.1 MB).

The report is not only about trading carbon, but it does demonstrate two things very clearly. First, the mess that carbon markets are currently in, and second, the World Bank’s obsession with carbon markets.
In his speech at CIFOR’s Forests Indonesia Conference this week, Andrew Steer, the World Bank’s special envoy for climate change, mentioned the report in passing:
“We’ve just done some analysis, and we’ve written a paper, for the G20 finance ministers. If the world decides to do what’s necessary to get on to a two degree path, about US$100 billion will be flowing each year from rich countries to the developing world through carbon offset markets at a price of US$25 to US$50 a ton.”
Here’s the table in the leaked World Bank report for the G20, from which Steer gets his figures:

Steer’s figure of US$100 billion a year hides more than it reveals. In his speech, Steer did not mention that this is the anticipated figure for 2020. In fact, he made it sound as if this might happen considerably sooner. His previous sentence was, “my prediction is that we will find a very robust carbon market four years from today.”

Perhaps the most relevant statement is found in the notes to this table: “The results reflect various assumptions that are spelled out in the report and would vary widely according the scenarios adopted by policy makers. For simplicity the numbers are shown as point estimates but reflect broad ranges spelled out in the text.”

The Bank estimates a carbon price of US$20 to US$25 per ton. A recent <="" a="">research note issued by Deutsche Bank reduces its estimates of the price of carbon up to 2020. Deutsche Bank’s estimate for 2011 is €12/t. The table below illustrates Deutsche Bank’s current estimates compared to its previous estimates....MORE
And from Nature:
As the world gears up for the next round of United Nations climate-change negotiations in Durban, South Africa, in November, evidence has emerged that a cornerstone of the existing global climate agreement, the international greenhouse-gas emissions-trading system, is seriously flawed.

Critics have long questioned the usefulness of the Clean Development Mechanism (CDM), which was established under the Kyoto Protocol. It allows rich countries to offset some of their carbon emissions by investing in climate-friendly projects, such as hydroelectric power and wind farms, in developing countries. Verified projects earn certified emission reductions (CERs) — carbon credits that can be bought and sold, and count towards meeting rich nations' carbon-reduction targets.

But a diplomatic cable published last month by the WikiLeaks website reveals that most of the CDM projects in India should not have been certified because they did not reduce emissions beyond those that would have been achieved without foreign investment. Indian officials have apparently known about the problem for at least two years. 

"What has leaked just confirms our view that in its present form the CDM is basically a farce," says Eva Filzmoser, programme director of CDM Watch, a Brussels-based watchdog organization. The revelations imply that millions of tonnes of claimed reductions in greenhouse-gas emissions are mere phantoms, she says, and potentially cast doubt over the principle of carbon trading. "In the face of these comments it is no wonder that the United States has backed away from emission trading," Filzmoser says....MORE
Throw it on the pile with the Chinese CFC-23 fraud which cost European homemakers something like $10 Billion and you start to wonder about that whole carbon trading schtick.

*From way back in October 2007:
Cap-and-Trade Market in Babies

"When Britain decided to end slavery,
Wilberforce didn't set up a cap-and-trade system"
That's me, misquoting myself.

Sometimes I find my fellow capitalists repulsive. When they lobby for political favors, then turn around and blandly refer to the result as an example of free markets I don't know whether to laugh, cry or attempt to destroy them. Laughing is probably the healthiest response, world domination the most challenging.

I've been looking for examples to skewer CO2 cap-and-trade.
One thought problem was how to end slavery.
Another was Nuclear weapons proliferation. Think about it.
Mr. Consultant comes up to you and says "The market based system of capping production and handing out allowances to produce nukes, which can then be traded, is the only rational approach".
Don't think too long though, lest you enter "Le Théâtre de l'Absurde". Trust me, the world of Jean Genet and Sam Beckett gets old fast, Pinter and Albee's, faster.

Here's another angle, from the Scotsman (scroll down):
NO-ONE could fail to be moved by last week's horrifying TV documentary on the missing children of China....

Société Générale's Albert Edwards: "S&P Fall to 400 Is ‘Inevitable’" (Sept. 29, 2011)

From CNBC:
Albert Edwards, a global strategist at Societe Generale, has been underweight stocks since 1996 and despite being met, he says, with "utter derision," believes a fall by the S&P to 400 is "almost inevitable."  

Edwards said he has been long government bonds for the same amount of time and now feels vindicated with the yield on the 10-year Treasury having fallen from 7 percent to 1.75 percent, "a hair’s breadth" from his longstanding target 1.5 percent target.

He dismisses those who argue that stocks are cheap historically and believes US stocks are overvalued based on Tobin’s Q , or the ratio of firms' assets to their stock prices; Shiller, Graham & Dodd’s normalized price-to-earnings ratios; and cyclically adjusted price-to-earnings measures. 

“Investors ignore these at their peril. The forward PE may be back down at the same level as the low of the last bear market, but 1) we are on peak earnings, and 2) the Ice Age secular trend of lower PE lows in this secular valuation bear market will mean that we move to single-digit PEs in this, the third post-bubble recession” said Edwards....MORE

Chartology: Things You Don't See Every Day (QQQ; PSQ)

I'v been at the market pretty much my entire adult life and can't recall a gap-open paralleling the prior day like this.
I have no idea what it means but would tend to think the bloom is off the German bailout vote rose.
From Shocked Investor:

As if things could not any weirder.

Look at the two parallel lines the two day chart:

UPDATED: Today in Crony Capitalism: Ron Pelosi Affiliated Company Scores $737 Million DOE Loan Guarantee

All animals are equal
But some are more equal than others
-George Orwell
Animal Farm, ch. 10, 1945

Update below.
Original post:
From The Hill:
The Energy Department announced Wednesday that is has finalized more than $1 billion in loan guarantees for two separate solar energy projects.

The decision comes several weeks after Solyndra, a California-based solar manufacturer that received a $535 million loan guarantee from the Obama administration in 2009, filed for bankruptcy and laid off 1,100 workers, setting off a firestorm in Washington.

DOE announced a $737 million loan guarantee to help finance construction of the Crescent Dunes Solar Energy Project, a 110-megawatt solar-power-generating facility in Nye County, Nev. The project is sponsored by Tonopah Solar, a subsidiary of California-based SolarReserve.
The Energy Department said the project will result in 600 construction jobs and 45 permanent jobs.

“If we want to be a player in the global clean energy race, we must continue to invest in innovative technologies that enable commercial-scale deployment of clean, renewable power like solar,” Energy Secretary Steven Chu said in a news release. “Solar generation facilities, like the Crescent Dunes Solar Energy Project, help supply energy to local utilities and create hundreds of good, American clean energy jobs.”...MORE
From VentureBeat last May:
...The company uses a huge array of mirrors to focus heat on a point on a large tower. The heat from the focused sunlight is used to boil water, creating steam that moves conventional turbines to generate electricity. It’s an alternative to traditional solar power projects that use large arrays of photovoltaic cells to capture sunlight and convert it to electricity. The idea is reminiscent of the Archimedes Death Ray, an oft-used trope in popular culture....
Here are Solar Reserve's Investment Partners:

Here's a bit of backround on PCG from Snow's Notes:
How Did Nancy Pelosi’s Brother-in-Law Become No. 2 at PCG?
The La Jolla, California-based gatekeeper has embraced yet another leadership structure following its purge by CalPERS. The latest line-up includes FINRA mediation expert and San Francisco political insider Ron Pelosi

It’s an unusual biography for a person listed second in the “Leadership” section of a private equity advisory firm’s website: “[A]ccomplished Financial Industry Regulatory Authority (FINRA) mediator. . .  has served in a number of positions as a public official.”

But perhaps the unusual circumstances of Pacific Corporate Group call for the unusual skills of Ronald Pelosi, a San Francisco political insider and financial industry polymath who happens to be the brother-in-law of Nancy Pelosi, the Minority Leader of the United States House of Representatives.

 La Jolla, California-based PCG is a veteran of the private equity gatekeeping industry and has been led since 1979 by Christopher Bower, a former public accountant who successfully gave the institutional investment market what it wanted – more and more private equity advice. PCG’s marquee client was the California Public Employees’ Retirement System, until recently. Late last year the nation’s largest pension decided to fire PCG as part of a house-cleaning exercise. The gatekeeper had been too close to disgraced placement agent Al Villalobos for CalPERS’ liking....MORE
Update: From the Washington Times:
... Kevin Smith, chief executive for SolarReserve, said PCG’s investment in SolarReserve is about one-percent. He said Mr. Pelosi was not involved in the project. Mr. Smith said that, unlike Solyndra, the project had a long-term revenue source locked up through a contract to sell power to the Nevada Power Company....

German Parliament Passes/Approves Bailout, Euro Fades

The Germans just made a huge mistake. Europe is going down and now Germany is on the hook.
The Eurocrats are happy though.
From the Washington Post:
Sean Gallup/GETTY IMAGES - German Chancellor Angela Merkel (center) smiles shortly after casting her ballot along with other Bundestag members in voting on an increase in funding for the European Financial Stability Facility on Thursday....MORE
From the Wall Street Journal:
Euro Sheds Gains 
The euro failed to hold above $1.37 for a second straight day Thursday, as currency markets struggled for direction after the German parliament voted to beef up the euro zone's bailout fund.

The single currency traded recently at $1.3624, compared with $1.3545 late Wednesday. The dollar was at ¥76.68 compared with ¥76.60, while the euro was at ¥104.51 compared with ¥103.74. The pound strengthened to $1.5645 from $1.5597 late Wednesday in New York.

The relief was muted in European hours even though German Chancellor Angela Merkel didn't need opposition votes to win approval of the expanded European Financial Stability Facility despite dissent within her ruling center-right coalition.

Analysts said investors continue to worry about Greece's ability to stave off default and whether the latest version of the €440 billion EFSF, agreed to at a euro-zone summit on July 21, will prove effective in containing a debt crisis that threatens to infect the global economy. There is growing talk of allowing the EFSF to borrow from the markets or to insure bondholders against losses.

"People want to know what's next. Are they going to leverage the EFSF or not? Will it require more parliamentary approval? Is this enough? A lot of questions have still need to be answered," said Geoffrey Yu, director foreign exchange strategy at UBS in London.

"The developments since July 21 have virtually rendered that agreement symbolic at best and now we need something more material, something bigger," he said.

Mr. Yu forecast a drop in the euro below $1.30 before year-end....MORE

Wednesday, September 28, 2011

"Euro drifts ahead of German vote"

From Reuters:
The euro was under modest pressure in Asia on Thursday on profit taking and squaring of positions following a large three-day rally, with investors still worried about the European debt crisis ahead of a crucial vote in Germany.

The euro was hovering at $1.3531, having climbed as far as $1.3690 at one stage, only to fade as the mood on Wall Street turned south following the extension of short-selling bans in some European nations.
The common currency, which dived to an eight-month trough of $1.3360 on Monday, has managed to pare some of its recent heavy losses, but is still down nearly 6 percent this month....MORE
The German Parliament votes at 0900 GMT on Thursday. 
Both the pundits and the currency seem to believe the vote will bind Germany to pay for the rescue of, well here, here's a list:


"German media mock U.S. advice on debt crisis" Ponders Return to European Coal and Steel Community

Just kidding about the retreat to the six nation agreement.
I don't think Berlin should hook up with Brussels.
Maybe Vienna.
Ja, that's the ticket.

This is just great.
It wasn't enough that the German Finance Minister said the plan advanced by Secretary Geithner was "stupid".
Now this, from the Los Angeles Times:
The Obama administration’s unsolicited advice to Europe on its government-debt debacle isn’t playing well in Germany, which will end up bankrolling any solution to the crisis.
The popular response, in a nutshell: Mind your own business, Amerika.

President Obama scolded Europe on Monday, saying its inability to contain the crisis was “scaring the world.” He continued to hold European policymakers’ feet to the fire on Wednesday, saying “we haven’t seen them deal with their banking system and their financial system as effectively as they needed to.”

Over the weekend, Treasury Secretary Timothy Geithner called on policymakers to “create a firewall against further contagion,” and supposedly has urged the European Union to commit trillions more euros to its bailout fund for member states and their banks -- an idea that German Finance Minister Wolfgang Schaeuble called “stupid.”

Spiegel Online on Wednesday published a collection of German media commentaries firing back at the  U.S.  Most biting was this one from the financial daily Handelsblatt:
Barack Obama governs a country where, despite billions in state aid, the economy is stagnating, companies refuse to invest despite calls for patriotism, and which gets embroiled in one political trench war after another … Now this country is dispensing advice, suggestions and finger-pointing....MORE

Solyndra’s $733M Plant Had Robots, Spa Showers

And not just any robots.
As I said in introducing last week's "How Did Solyndra Spend All That Money?":
That is one of the three big questions for tomorrow's hearing, the other two being why did they build a brand new building in a weak commercial real estate market and how real were the sales that the company touted as totalling $2 Billion in backlog?...
If the NUMMI plant was good enough for the GM-Toyota partnership couldn't they have just bought it and installed clean rooms? Noooo...
In 2010 it went to Tesla Motors, whose Elon Musk has emerged as the King of the New-age welfare queens. More on that subject another day.
[ummm, gender-bender alert? -ed]
From Bloomberg:
The glass-and-metal building that Solyndra LLC began erecting alongside Interstate 880 in Fremont, California, in September 2009 was something the Silicon Valley area hadn’t seen in years: a new factory.
It wasn’t just any factory. When it was completed at an estimated cost of $733 million, including proceeds from a $535 million U.S. loan guarantee, it covered 300,000 square feet, the equivalent of five football fields. It had robots that whistled Disney tunes, spa-like showers with liquid-crystal displays of the water temperature, and glass-walled conference rooms.

“The new building is like the Taj Mahal,” John Pierce, 54, a San Jose resident who worked as a facilities manager at Solyndra, said in an interview.

The building, designed to make far more solar panels than Solyndra got orders for, is now shuttered, and U.S. taxpayers may be stuck with it. Solyndra filed for bankruptcy protection on Sept. 6, leaving in its wake investigations by Congress and the Federal Bureau of Investigation and a Republican-fueled political embarrassment for the Obama administration, which issued the loan guarantee. About 1,100 workers lost their jobs.

Amid the still-unfolding postmortems, the factory stands as emblematic of money misspent and the Field of Dreams ethos that seemed to drive the venture, said Ramesh Misra, a solar-industry analyst in Los Angeles for Brigantine Advisors....MORE

Climateer Line of the Day: Analogy Edition

Alphaville's John McDermott bring's home the prestigious CLoD with a walk-off home run (
Correlation is to financial journalists what patriotism is to scoundrels. ...

Market Cracks--"Jeff Gundlach: Europe Has Already Crashed, Recession Has Already Begun" (DIA; QQQ; SYY)

The major Indexes (indices?) are now down 7/10 percent.
From MarketBeat:
The country is already in a recession, according to bond manager Jeffrey Gundlach, who predicted “there’s going to be a big loss in Europe.”

“We’re in a recession right now,” Gundlach said, as he reviewed a hefty deck of slides with dreary data. Statistics on the polarization of wealth in the U.S., dim headlines about sentiment in locales abroad and the European bond market were among the reasons Gundlach cited for his dour forecasts....MORE
The German Bundestag votes tomorrow and one senior judge had said it is illegal to bind the country without a referendum.
Sept. 25 
Watch the Sept. 29 German Vote on the EFSF
Sept. 26 
Repost:Euro: Quick Recovery From Opening Gap Down Even As China Says Again It Won't Bail Out Europe (EUR/USD)
Sept. 27 
It's Not Over Until..."German turmoil over EU bail-outs as top judge calls for referendum"

M&A "That’s One Reason to Delay a Deal"

From DealBook:
Bain Capital has delayed its $3.7 billion takeover of Skylark, a Japanese restaurant chain, following a late-August outbreak of dysentery that shuttered 120 locations for about a month, according to the publication Basis Point. Read more »

"Statistical Results Associated With Increased Risk Of Exaggerating Risk"

From William Briggs, Statistician to the Stars:
Our title, which is indistinguishable from a flood of others1, might read, “Reading Articles About The Misuse Of Statistics Increases Risk Of Apoplexy.”

Yes, for every article you read like this one, your risk of becoming apoplectic over the improper use of statistics increases 2.0 times.

What does that “2.0-fold increase in risk” mean? Not just for this finding, but for any which reports results in the form of “increased risk” of suffering from a malady after being exposed to some “risk factor.” In this study, “exposure” is reading this blog, which is the risk factor, and “non-exposure” is not reading.

Suppose (somehow) you knew the probability of developing the malady given you were not exposed to the “risk factor.” Call it probnot exposed. You also have to know (somehow) the probability of developing the malady given you were exposed; called probexposed. Relative risk is

     RR = probexposed / probnot exposed.
You could also calculated the odds ratio. First know that odds are a one-to-one function of probability, viz:
     Odds = prob / (1 – prob).
The odds ratio is like the risk ratio, but the ratio of the odds, not probabilities:
     OR = oddsexposed / oddsnot exposed.

Now suppose that probnot exposed = 0.000001, which is a one in a million chance of developing the malady given you were not exposed. If you then hear that being exposed “increases the risk by 2.0 fold”, then this means the risk ratio must be 2.0. Back solving gives the probability of developing the malady after exposure as 0.000002. (Similar calculations can be done for odds ratios.)

In this case, exposure drove your risk from one in a million to just 2 in a million. We can already see that presenting results in raw probability will not be as pulse pounding as speaking in terms of risk or odds. Information is also lost in giving the risk ratio: the customer has no idea what the risk is in the control group. So one fix would be to give emphasis to the actual probabilities of suffering, and not just the risk ratio.

But even if that is done, something would still be wrong. Can you spot what?...MORE

The Greek Situation, Simplified

(last used on Albert Einstein's birthday, 2009, when the speed of light was still a constant, alpha sigh)

Today in Crony Capitalism: Rick Perry and Infrastructure; Barack Obama and General Electric (GE)

First up, the President and General Electric from Marginal Revolution:
Why they call it Green Energy: The Summers/Klain/Browner Memo
The LA Times reports that Larry Summers and Timothy Geithner ”raised warning flags” about the loan guarantee program for renewables long before the Solyndra bankruptcy. The article doesn’t have a lot of new information (the key players are clearly protecting themselves) but it does link to a fascinating briefing memo written for the President in October of 2010 by Summers, Ron Klain (then chief of staff to the Vice President), and energy advisor Carol Browner.
The memo says that OMB and Treasury were concerned about three problems, “double dipping” (massive government subsidies from multiple sources), lack of “skin in the game” from private investors and  ”non-incremental investment,” the funding of projects which would occur even without the loan guarantee.
The memo then illustrates with one such program, the Shepherds Flat Loan guarantee. Here is the relevant portion of the memo:
The Shepherds Flat loan guarantee illustrates some of the economic and public policy issues raised by OMB and Treasury. Shepherds Flat is an 845-megawatt wind farm proposed for Oregon. This $1.9 billion project would consist of 338 GE wind turbines manufactured in South Carolina and Florida and, upon completion; it would represent the largest wind farm in the country.
The sponsor’s equity is about 11% of the project costs, and would generate an estimated return on equity of 30%.
Double dipping: The total government subsidies are about $1.2 billion.
Subsidy Type
Approximate Amount (millions)
Federal 1603 grant (equal to 30% investment tax credit)
State tax credits
Accelerated depreciation on Federal and State taxes
Value of loan guarantee
Premium paid for power from state renewable electricity standard

Skin in the game: The government would provide a significant subsidy (65+%), while the sponsor would provide little skin in the game (equity about 10%).
Non-incremental investment: This project would likely move without the loan guarantee. The economics are favorable for wind investment given tax credits and state renewable energy standards. GE signaled through Hill staff that it considered going to the private market for financing out of frustration with the review process. The return on equity is high (30%) because of tax credits, grants, and selling power at above-market rates, which suggests that the alternative of private financing would not make the project financially non-viable.
Carbon reduction benefits: If this wind power displaced power generated from sources with the average California carbon intensity, it would result in about 18 million fewer tons of CO2 emissions through 2033. Carbon reductions would have to be valued at nearly $130 per ton CO2 for the climate benefits to equal the subsidies (more than 6 times the primary estimate used by the government in evaluating rules).
In my view, the Summers/Klain/Browner analysis was a damning indictment of the Shepherds Flat project. The taxpayers were expected to fund by far the largest share of the bills and also of the risk and in return they weren’t getting many benefits in terms of reduced pollution. In contrast, Caithness Energy and GE Energy Financial Services, the corporations behind the project, weren’t taking much risk but they stood to profit handsomely. I guess that is why they call it “green” energy....MORE
And from Economic Policy Journal a look at the Governor's dealings:

Rick Perry' s Cintra Problem
Madrid-based Cintra is involved in road construction projects across the globe, including the operation of the Indiana Toll Road. Because of lower than expected traffic on the toll road, speculation is mounting that Cintra may default on its $3.8 billion Indiana operation.

What does this have to do with Rick Perry?

Cintra and its partners are also building in Texas the $2.1 billion North Tarrant Express, which involves the reconstruction of Loop 820 and Texas 121/183 in Northeast Tarrant County. Cintra is also the lead partner in the LBJ Express, which includes the expansion of Interstate 635 in Dallas.

The company is also lead partner in two segments of the Texas 130 toll road project between Austin and San Antonio.

The projects include both toll and free lanes and in total amount to more than  $5 billion in projects in Texas. Rick Perry pushed all these projects through..

A key feature of the North Tarant Express contract is that Cintra is guaranteed a buyback by the state of Texas (aka Texas taxpayers) if the project proves unprofitable, just like the Indiana project is now unprofitable.

No one really knows what financial state the Texas projects are in. According to the Fort Worth Star Telegram:

While nothing indicates that the Texas projects are at risk, transportation officials are privately expressing concern about whether Cintra and other developers will complete the work, considered an indispensable part of Texas' plan to handle population and economic growth over the next half-century.
Bill Meadows, a Texas Transportation Commission member, has asked for an analysis of the state's 52-year contracts with Cintra and its partners -- NTE Mobility Partners on the North Tarrant Express project -- as it relates to default.
If Cintra defaults in Indiana, focus is going to turn to Texas. Among the things that will be discovered are these details:

Perry's former staffer Dan Shelley worked as a ‘consultant’ for Cintra (in 2004), became Perry’s liaison to the legislature during the time that Cintra was awarded the development rights to the multi-billion dollar Trans Texas Corridor (in 2005), then went back to work as a lobbyist for Cintra (in 2006). Shelly's daughter, Jennifer Shelley-Rodriguez, also has a consulting contract with Cintra....MORE

Don't Sweat it Greece, Sovereign Default is Normal

Everyone knows* that the sovereign default of England's King Edward III bankrupted Florence's Bardi and Peruzzi banking dynasties in 1345. And everyone knows** that Argentina's default in 1890 brought Baring's bank to the brink of insolvency, staved off by the massive rescue operation organized by the Bank of England.

My question was how common are sovereign defaults?
I found a couple dozen answers in the bookcase and on the 'net but the most interesting came from Bedlam Asset Management.

First a short digression.
The first thing that strikes you is: These people named their firm after the most famous lunatic asylum in the world?
This must be a put on.
Then I read a couple of their market commentaries. They are good. It's not a put on.
I went to their website where the front page says it is for institutional investors only.
No problem.
I click the enter button and am greeted with:

 Welcome to Bedlam 
A website for institutional investors

This has got to be a put on. Welcome to Bedlam?
I go back and Google a couple more of their papers. They're erudite and comport with my understanding of markets, economics, finance etc.
So I click on the team page where I see this poor unfortunate:

 Richard Greenwood | Senior Research Analyst
  • 6 years industry experience
  • Joined Bedlam in 2007
  • Chartered Accountant
  • Lincoln College, Oxford
    - BA (Hons) in Classics
r greenwood Richard commenced work at Deloitte and Touche in 2003 where he specialized in tax cash flow modeling and due diligence reports for private equity M&A. His other experience includes academic instruction; from 1999-2003 Richard taught Classics, Latin and Greek at Wisbech Grammar School.

I swear to God he looks as troubled as SocGen's Albert Edwards trying to laugh.
Some of the other photos also appear just a bit off:

Robert Dann | Institutional Sales & Client Relationships
  • 5 years industry experience
  • Joined Bedlam in 2005
  • BBA (Hons) Business Administration, University of Kent at Canterbury
  • Fluent in Spanish and Portuguese
Robert Dann Rob first worked at Bedlam as an intern then joined full time after gaining his degree in Business Administration. Robert is also a Non-Exec Director of a London Wine Merchant.

I'm really thinking this is a put on.
But another part of me says "Hey if he is a director at, say, Berry Bros. & Rudd..."
All morning I've been quoting that line William Goldman put in Butch Cassidy's mouth as the posse tracked he and Sundance relentlessly:
"Who are these guys?"
Just a few minutes ago I was shown that they were vetted by FT Alphaville's Izabella Kaminska.
That's good enough for me.
Here goes. From Bedlam Capital Management PLC, March 14, 2009:

Sovereign default
“Dictum meum pactum?”

The world of high finance is full of charlatans; those who claim never to have been duped are
lying or unaware. When clinching a deal, these fraudsters seize your hand in a manly but
friendly grip, look you in the eye and utter the immortal phrase “my word is my bond”. In
olden times, the 1990s, the more professional crooks would often say “dictum meum
pactum”*. This means the same thing but being in Latin shows great erudition, thus adding
credibility. If a man (and usually it is a man) insists on telling you he is honest, something’s
seriously wrong. Today, more dubious people than ever are saying ‘trust me’, and investors
are doing just that. Having lost millions to one group of hustlers – be they funds of hedge
funds, SIVs or structured products - they are now fleeing by the billions of dollars to other
fraudsters: central bankers selling the perceived safety of government bonds. Moreover, so
great is the issuance of these IOUs that inevitably there is a giant crowding out effect on the
private sector borrower. This ensures that bankruptcies accelerate, thus bond issuance must
do so as well.

Although objectively (sic) we are the greatest living authority on bank valuations and cycles
(as the only firm in the world never to have held bank shares in the English speaking world),
we make no claims as bond experts. Despite this caveat, we do understand when supply and
demand are chronically out of balance. Such analysis on bonds suggests that financial
markets are in for the worst shock of all – a series of Sovereign Defaults. ‘Don’t know where,
don’t know when,’ as the Platters used to croon, but this time default will not just be a third
world problem but will include some industrial nations.

Mankind is a natural herd animal. Criticising the status quo is never popular. Only when it
has become blindingly obvious that the decision makers and leaders are unquestionably
idiotic and their policies disastrous does the herd tear them to pieces. This is often when
default occurs. Debt markets and politicians are not prepared for these events. Given the
atrocious supply/demand dynamics, trusting in government issued paper is now one of the
worst investments anyone can make.

What is a Government Bond?
Until recently, none of us had ever read in full what is written on an American or British
government bond or the offer documents. There are lots of words and caveats, not dissimilar
to Bank of England bank notes with their lingering promise from the days when these notes
could be redeemed in gold.

Government bonds are the standard benchmark for risk. Their yield sets the borrowing costs
for everyone else. There is logic to this, as in theory the obligation to pay at some future date
by issuing government paper in prudent quantities can always be met through changing tax
rates or curbing government expenditure to raise the necessary funds. The promises are more
explicit than bank notes and commit future governments to meet these liabilities even though
their leaders may not yet have been born.
*Also the motto of the London Stock Exchange. Enough said.

Default is normal
It is not widely realised that governments failing to meet their debt obligations are
astonishingly normal. Indeed, it is utterly abnormal for a country to have a track record longer
than three generations of paying back IOUs issued by dead people. The chart below shows the
number of countries in default of their sovereign obligations in each year since 1823.

This chart understates the true extent of default; for at the sub-national level many states or
cities - such as four American states in the 1830s (well before the civil war), or the City of
Cleveland (Ohio) in 1978 - defaulted on their bonds. China created havoc in the late 1990s
when several of its local state-owned investment companies defaulted. Beijing-based
politicians and the central bank had always suggested they were government backed. When
these investment companies gambled themselves into bankruptcy, bond holders hired
translators and discovered they were not even backed by the regional governments which had
issued them. Meanwhile the Politburo developed collective amnesia....MORE

If you meet BCM's requirements do read their Q3 Global Investment Review and the Monthly Bulletin for September.

*If you read our little blog:
"How Venice Rigged the First, and Worst, Global Financial Crash"