Tuesday, March 3, 2015

The Best Selling Photographer In the World Has a Sweet Racket

From the New York Times, Feb. 21, 2015:

Peter Lik’s Recipe for Success: Sell Prints. Print Money.
Peter Lik is in awe of himself. When he describes his career as a fine-art photographer, he speaks with the satisfaction of a guy who has performed miracles, at the pace of a bystander who just caught a glimpse of Superman. The words tumble forth in self-exalting, run-on sentences, most of them laced with profanity, all of them in the sunny, chummy accent of his native Australia.

“I’m the world’s most famous photographer, most sought-after photographer, most awarded photographer,” he said one recent afternoon, sipping a can of Red Bull in a conference room at Peter Lik USA, a 100,000-square-foot headquarters in Las Vegas devoted solely to the production and sale of Peter Lik photography. “So I said” — and what Mr. Lik said next is an unprintable version of “the heck with it,” and then — “I want to make something special, special, special, special.”

That something special was a photograph called “Phantom,” an image of an eerily human-shaped swirl of dust in Antelope Canyon in Arizona. In December, his company announced in a news release that an anonymous collector had spent $6.5 million for “Phantom.” That crushed the previous record, held by Andreas Gursky, whose “Rhein II” fetched $4.3 million at an auction in 2011, and Cindy Sherman, whose “Untitled #96” brought $3.9 million at another auction the same year.

"Ghost" is a color version of “Phantom,” which Mr. Lik says is the most expensive photograph ever sold, at $6.5 million, to an anonymous buyer. Credit Peter Lik

But Mr. Gursky and Ms. Sherman are titans, with solo shows in pre-eminent museums.

Who is Peter Lik?

It irks him a little that you have to ask. Because by one measure — money — Mr. Lik may well be the most successful fine-art photographer who ever lived. He has sold $440 million worth of prints, according to his chief financial officer, in 15 galleries in the United States that he owns and that sell his work. The images are mostly panoramic shots of trees, sky, lakes, deserts and blue water in supersaturated colors. Generally speaking, his buyers are not people who acquire the art of Andreas Gursky and Cindy Sherman.

Which is just one reason that Mr. Lik considers himself an artist working outside a system established by elitist tastemakers. And while he says he doesn’t mind being snubbed by the establishment, part of him is bothered that his renown has lagged woefully behind his level of financial success.

So six months ago, he had an idea. Nearly every Peter Lik photograph is printed in a “limited edition” of 995; the first print sells at about $4,000, with the price rising as the edition sells out. With his eye fixed on a record-setting sale, he printed a single copy of “Phantom.” Then he alerted a handful of his most ardent collectors, one of whom, he said, agreed to the $6.5 million price. Before the deal was signed, Mr. Lik hired a public relations firm to make sure that the sale, and the record, were noticed....MORE
HT: The Conglomerate:
There's No Accounting For Taste Or Common Law Fraud?

"The Aging of the Tech Sector: The Pricing Divergence of Young and Old Tech Companies"

From Musings on Markets, Feb. 26, 2015:
As the NASDAQ approaches historic highs, Apple’s market cap exceeds that of the Bovespa (the Brazilian equity index) and young social media companies like Snapchat have nosebleed valuations, there is talk of a tech bubble again. It is human nature to group or classify individuals or entities and assign common characteristics to the group and we tend to do the same, when investing. Specifically, we categorize stocks into sectors or groups and assume that many or most stocks in each group share commonalities. Thus, we assume that utility stocks have little growth and pay large dividends and commodity and cyclical stocks have volatile earnings largely because of macroeconomic factors. With “tech” stocks, the common characteristics that come to mind for many investors are high growth, high risk and low cash payout. While that would have been true for the typical tech stock in the 1980s, is it still true? More specifically, what does the typical tech company look like, how is it priced and is its pricing put it in a bubble? As I hope to argue in the section below, the answers depend upon which segment of the tech sector you look at.

A Short History of Tech Stocks

My first foray into investing was in the early 1980s, as the market started its long bull market run that lasted for almost two decades. In 1981, the technology stocks in the market were mainframe computer manufacturers, led by IBM and a group of smaller companies lumped together as the seven dwarves (Burroughs, Univac, NCR, Honeywell etc.). Not only were they collectively a small proportion of the entire market, but of the list of top ten companies, in market capitalization terms, in 1981, only one (IBM) could have been categorized as a technology stock (though GE had a small stake in computer-related businesses then):
During the 1980s, the personal computer revolution created a new wave of technology companies and while IBM fell from grace, companies catering to the PC business such as Microsoft, Compaq and Dell rose up the market cap ranks. By 1991, the top ten stocks still included only one technology company, IBM, and it had slipped in the rankings. However even in 1991, technology stocks remained a small portion of the market, comprising less than 7% of the S&P 500. During the 1990s, the dot-com boom created a surge in technology companies and their valuations, and while the busting of that boom in 2000 caused a reassessment, technology has become a larger piece of the overall market, as evidenced by this graph that describes the breakdown, by sector, for the S&P 500 from 1991 to 2014:
Market Capitalization at the end of each year (S&P Capital IQ)
(click through to enlarge)
There are two things to note in this graph. 
  1. The first is that technology as a percentage of the market has remained stable since 2009, which calls into question the notion that technology stocks have powered the bull market of the last five years. 
  2. The second is that technology is now the largest single slice of the equity market in the United States and close to the second largest in the global market. So what? Just as growth becomes more difficult for a company as it gets larger and becomes a larger part of the economy, technology collectively is running into a scaling problem, where its growth rate is converging on the growth rate for the economy. While this convergence is sometimes obscured by the focus on earnings per share growth, the growth rate in revenues at technology companies collectively has been moving towards the growth rate of the economy.

The Diversity of Technology
As technology ages and becomes a larger part of the economy, a second phenomenon is occurring. Companies within the sector are becoming much more heterogeneous not only in the businesses that they operate in, but also in their growth and operating characteristics. To see these differences, let’s start by looking at the sector and its composition in terms of age at the start of 2015. In February 2015, there were 2816 firms that were classified as technology companies, just in the United States, accounting for 31.7% for all publicly traded companies in the US market....MORE

What Will Life Be Like in an Artificial Intelligence Future?

He begins with a light-hearted romp through the current state of play.
From Irving Wladawsky-Berger:
People have long argued about the future impact of technology.  But, as AI is now seemingly everywhere, the concerns surrounding its long term impact may well be in a class by themselves.  Like no other technology, AI forces us to explore the boundaries between machines and humans.  What will life be like in such an AI future?

Not surprisingly, considerable speculation surrounds this question.  At one end we find books and articles exploring AI’s impact on jobs and the economy.  Will AI turn out like other major innovations, e.g., steam power, electricity, cars, -  highly disruptive in the near term, but ultimately beneficial to society?  Or, as our smart machines are being increasingly applied to cognitive activities, will we see more radical economic and societal transformations?  We don’t really know

These concerns are not new.  In a 1930 essay, for example, English economist John Maynard Keynes warned about the coming technological unemployment, a new societal disease whereby automation would outrun our ability to create new jobs.

Then we have the more speculative predictions, that in the not too distant future, a sentient, superintelligent AI might be able to far surpass human intelligence as well as experience human-like feelings.  Such an AI, we are warned, might even pose an “existential risk” that “could spell the end of the human race.”
A number of experts view these superintelligence predictions as yet another round of the periodic AI hype that in the 1980s led to the so-called AI winter.  Interest in AI declined until the field was reborn in the 1990s by embracing an engineering-based data-intensive, analytics paradigm.  To help us understand what an AI future might be like, Stanford University recently launched AI100, “a 100-year effort to study and anticipate how the effects of artificial intelligence will ripple through every aspect of how people work, live and play.”

Superintelligence is a truly fascinating subject, the stuff of science fiction novels and movies.  But, whether you believe in it or not, how can we best frame a serious discussion of the subject?  I believe that in the end, it comes down to which of two major forces will prevail over time - exponential growth or complexity brake. 

In their 2011 bestseller, Race Against the Machine, MIT’s Erik Brynjolfsson and Andy McAfee argue that the breakthrough advances AI has achieved in just the past few years, - e.g. Watson, Siri, Google driverless cars, - are the result of Moore’s Law and exponential growth.  They illustrate the power of exponential growth using an ancient Indian story about the creation of chess. 

According to the story, upon being shown the game of chess, the emperor was so pleased that he told its inventor to name his own reward.  The inventor proceeded to request what seemed like a modest reward.  He asked for an amount of rice computed as follows: one grain of rice for the first square of the chess board, two grains for the second one, four for the third and so on, doubling the amount each time up to the 64th square. 

After 32 squares, the inventor had received 232 or about 4 billion grains of rice, roughly one large field’s worth weighing about 100,000 kilograms - a large, but not unreasonable reward.  However, the second half of the chess board is different due the power of exponential growth.  After 64 squares, the total amount of rice, 264, would have made a heap bigger than Mount Everest and would have been roughly 1000 times the world’s total production of rice in 2010. 

Digital technologies have recently entered the second half of the chessboard.  If we assume 1958 as the starting year and the standard 18 months for the doubling of Moore’s Law, 32 doublings would then take us to 2006, - “into the phase where exponential growth yields jaw-dropping results.”  What happens then?

In his 2005 book, The Singularity is Near: When Humans Transcend Biology, - author and inventor Ray Kurzweil predicted that exponential advances in technology, lead to what he calls The Law of Accelerating Returns.  As a result, around 2045 we will reach the Singularity, at which time “machine intelligence will be infinitely more powerful than all human intelligence combined.” ...MORE

"Re/insurance. The engine of Berkshire Hathaway: Warren Buffett" (BRK) Plus a Special Bonus!

From Artemis:
Warren Buffett’s much-anticipated 50th anniversary letter to Berkshire Hathaway investors was published on Saturday and the ‘Sage of Omaha’ explained that insurance and reinsurance has been “the engine” that propelled the firm’s expansion.

Buffett’s was the first to truly discover the value of insurance premium float, by building huge pools of capital that he could put to work across his diversified investment focused business. As such he is the inspiration of many of the hedge fund strategy reinsurers, and the envy of many traditional insurers and reinsurers.

Berkshire Hathaway has such a strong capital base, as a result of the Warren Buffett strategy, that the largest insurers and reinsurers turn to Berkshire when they need a counterparty who can put down the largest lines in the industry and who they trust to be there to pay claims in another 50 years time.

So, it’s always insightful to take a look at some of the sage’s comments and in the 50th anniversary investor letter Warren Buffett gives away some of more of his thinking behind the way Berkshire has leveraged insurance and reinsurance premium float, as well as how important re/insurance has been to enable Berkshire Hathaway to become a huge and profitable business empire

Buffett’s letter includes a history lesson on Berkshire Hathaway’s entry into the insurance and reinsurance world, explaining; “That industry has been the engine that has propelled our expansion since 1967, when we acquired National Indemnity and its sister company, National Fire & Marine, for $8.6 million.”
Just think about that for a moment. The largest re/insurance business empire in the world began from an $8.6 million acquisition. That small acquisition, which was still a significant sum in 1967, has now morphed into a re/insurance business that in 2014 generated $2.7 billion of underwriting profit and over the last twelve years which have all been profitable, $24 billion.

Buffett said that “insurance was in my sweet spot”, an industry that he understood and saw as a way to generate both huge profits as well as huge premium float for investment purposes.

During the twelve successive profitable years of underwriting at Berkshire Hathaway the firm has generated a massive amount of premium float. “During that 12-year stretch, our float – money that doesn’t belong to us but that we can invest for Berkshire’s benefit – has grown from $41 billion to $84 billion,” Buffett explained.
The float is something Buffett always explains in his letters, because; “Though neither that gain nor the size of our float is reflected in Berkshire’s earnings, float generates significant investment income because of the assets it allows us to hold.”....MORE
Special Bonus: the earliest known video of Mr. Buffett, 1962, from the Nebraska State Historical Society archives:

Schwab 'Robo-adviser' Bets it All On Red, Hits, Says Let It Ride

Just kidding. Here's the real story from Investment News:

Schwab 'robo-adviser' bets big on cash and 'smart' beta
Brokerage platform will use asset-allocation strategies of disputed merit with retail clients

Look under the hood of Charles Schwab Corp.'s “robo-adviser” and you'll find a good amount of cash and the handiwork of a goateed gentleman named Rob Arnott.
Schwab will make extensive use of index-based investment strategies popularized largely by Mr. Arnott in a digital investment offering it plans to unveil soon, according to an InvestmentNews analysis of disclosures made by the brokerage.

Schwab Intelligent Portfolios, the firm's first big push into the booming world of digitized wealth management and investment portfolios, is scheduled to launch before the end of March.
In an extensive set of disclosures about the fund-selection criteria, the San Francisco-based firm has given its first indication of how it will construct portfolios for clients of the service (think, passive), which products it will use (think, ETFs) and how much it will cost investors (it's complicated).

Neither Mr. Arnott's name nor that of his Newport Beach, Calif.-based firm, Research Affiliates, appear in the disclosures. Yet among the more eye-popping revelations in those documents, Schwab will make substantial allocations to a range of its own proprietary products that rely on indexes developed and popularized in large part by Research Affiliates.

A Schwab spokesman, Michael Cianfrocca, said officials were not available for comment.
Research Affiliates' Rob Arnott
Research Affiliates' Rob Arnott (Bloomberg News)
Schwab will make sizable allocations of investor money to cash held at a Schwab-affiliated bank, a fact which has drawn attention because Schwab is earning a good portion of its revenue on the program from reinvesting those dollars. The allocations could be about 7% for a hypothetical 30-year-old, aggressive investor and 15% for a more conservative 65-year-old, according to the disclosure.

Schwab's choices drew skepticism from financial advisers, whose profession continues to grapple with the implications of a small-but-growing group of robo-advisers that may threaten their role in the delivery of some investment guidance.

“It seems that Schwab is hard-selling having a cash position in the portfolio, which gives me pause since it has become clear that will make a not-insignificant portion of the expected revenue,” said James D. Osborne, a financial adviser and president of Bason Asset Management in Lakewood, Colo. “Most investors have meaningful cash allocations outside of their portfolios, in savings accounts, money markets or other liquid funds. I am not convinced, especially for more aggressive investors, that a cash allocation adds meaningful benefit to a diversified portfolio.”

Meanwhile, Liz Miller, president of Summit Place Financial Advisors in Summit, N.J., called smart beta a “fad.”...MORE

Not Smooth Enough To be An Art Advisor? Be An Art Attorney!

From Barron's Penta:

Art Law Rising
The fast-growing and unregulated art market, invaded by art-collecting novices, has already seen a proliferation of hand-holding art advisors. Now we are seeing a new art advisor enter the market: specialist lawyers helping to settle ownership, copyright and authenticity disputes.

“Even people that have experience make common mistakes,” says Brian Kerr, partner at the recently launched art law firm Spencer Kerr. “The works being sold are of staggering value so the stakes are just too high.” That’s precisely when people reach for their lawyers.

Ronald Perelman purchased Popeye, by artist Jeff Koons, from Larry Gagosian.
Consider billionaire art collector Ronald Perelman, who sued fabled art dealer Larry Gagosian, claiming Gagosian “took advantage of his position of trust” and misrepresented the value of certain works. According to the lawsuit, Gagosian overvalued works sold to Perelman and undervalued pieces it bought from the collector. Among the works changing hands were sculptures by Jeff Koons and Richard Serra and paintings by Cy Twombly. In December, Perelman lost in an appeal with a five-judge panel essentially ruling that the sophisticated collector could have conducted his own due diligence.

Kerr represented London-based filmmaker Joe Simon-Whelan, in 2009, against the Warhol Foundation for the Visual Arts. Simon-Whelan purchased a Warhol silkscreen self-portrait for $195,000 in 1989, which back then was deemed genuine by the foundation. He resubmitted it to the foundation for authentication, in 2001 and 2003, just before an anticipated $2 million sale, and this time the work was twice branded a fake....MORE

Barclays Rolls Out Apprenticeship Scheme for Those Over 50

There has to be a very British sitcom in here somewhere.
From Real Business:
Often seen as a way of up-skilling the younger generation, high street bank Barclays has formed a different offering by creating apprenticeship’s aimed at individuals aged 50 and above.

Having taken on 2,000 young apprentices in its 2014 programme, Barclays is hoping to bolster its customer offering by adding a more diverse range of new hires in the shape of over 50 roles.

Background research by Real Business has revealed that the pilot scheme will begin in the second half of 2015 and will provide real life experience of taking out a mortgage or saving for the future.

We reached out to Barclays for comment, and head of apprenticeships Mike Thompson said: “We see real benefit in employing a workforce that reflects the diversity of our customer base. Building on the success of our existing apprenticeships programme though which we have appointed over 2,000 apprentices, we are exploring the value that those returning to work or looking for a new career can bring to our business....MORE

"Venezuela uses "F word" to discredit fracking"

From Reuters:

(Editor's Note: please be advised that paragraphs one and two contain language that may offend some readers)
By Alexandra Ulmer

(Reuters) - Venezuela is not mincing words with a new exhibition titled "F---ing Fracking" that denounces the environmental toll of hydraulic fracturing in the United States.

"Today at 4pm .... Inauguration of the educational exhibit #FuckingFracking ... Don't miss it," ruling Socialist Party official Ernesto Villegas said on Twitter.

The event features speeches by an economist and oil expert, and will wrap up with a play, according to a half-page advertisement in newspaper Ultimas Noticias.

The ad depicts a fractured heart dripping with black oil with dried up leaves coming from the arteries. 
President Nicolas Maduro has for months alleged that the United States is deliberately flooding the market with shale oil to sink prices and destabilize his OPEC nation, as well as Russia.

The decline in oil prices has slammed his increasingly cash-strapped and unpopular government in the midst of a deep recession and ahead of important parliamentary elections....MORE

Long Term Investing: Buy and Hold, Eighty Years at a Time

Alternate title: No news is good news.

From Reuters:
Buy-and-hold fund prospers with no new bets in 80 years
 Equity investors pursuing a buy-and-hold strategy might want to check out a fund that hasn't made an original stock market bet in 80 years.

    The Voya Corporate Leaders Trust Fund, now run by a unit of Voya Financial Inc bought equal amounts of stock in 30 major U.S. corporations in 1935 and hasn't picked a new stock since.

    Some of its holdings are unchanged, including DuPont, General Electric, Procter & Gamble and Union Pacific. Others were spun off from or acquired from original components, including Berkshire Hathaway (successor to the Atchison Topeka and Santa Fe Railway); CBS (acquired by Westinghouse Electric and renamed); and Honeywell (which bought Allied Chemical and Dye). Some are just gone, including the Pennsylvania Railroad Co. and American Can. Twenty-one stocks remain in the fund.

    The plan is simple, and the results have been good. Light on banks and heavy on industrials and energy, the fund has beaten 98 percent of its peers, known as large value funds, over both the past five and ten years, according to Morningstar.

"This fund has been around a lot longer than I have, and it's working," said Craig Watkins, 29, an investment analyst for Conover Capital Management in Bellevue, Washington. Conover has recommended the Voya fund to 401(k) plans it advises.

    Watkins compared the Voya fund's "deep-value" approach to investor Warren Buffett's, whose Berkshire Hathaway is the fund's second-largest holding.

    "It's deep-value in the sense that all the companies in the portfolio have an amazing tenure," Watkins said. He said the Voya fund's strategy can be better than an index fund because it doesn't have to change its weightings when the index changes

    The winning performance has drawn record inflows: Since 2011, the fund has taken in about $708 million from investors, its best four years ever, according to Thomson Reuters' Lipper unit.

    The fund has made a comeback since 1988, when it was reorganized by Lexington Management in Saddle Brook, New Jersey. Former Lexington executive Lawrence Kantor said high fees tied to its outdated trust structure kept it from getting any flows, and changing to a unit investment trust made it competitive with modern funds.

The fund "was dead in the water for like 20 years" because "it had such an outdated structure that it wasn't saleable," Kantor said.

    Told the fund now has $1.7 billion, Kantor, 67, said "That’s incredible, because when we reopened the fund I think it had $60 million in assets."...MORE
HT: Alphaville's Further Reading post

Possibly also of interest:
Long Time Horizon's: The Methuselah Trust of Hartwick College

The post immediately below, "From Rob Arnott's Research Affiliates: What Assets Should Go Into a Portfolio You Can't Touch for Three Years", reminded me of one of the odder stories in the investment biz.
First posted September 2011.
From Lapham's Quarterly:
Hartwick College didn’t really mean to annihilate the U.S. economy. A small liberal-arts school in the Catskills, Hartwick is the kind of sleepy institution that local worthies were in the habit of founding back in the 1790s; it counts a former ambassador to Belize among its more prominent alumni, and placidly reclines in its berth as the number-174-ranked liberal-arts college in the country. But along with charming buildings and a spring-fed lake, the college once possessed a rather more unusual feature: a slumbering giant of compound interest.

With bank rates currently bottomed out, it’s hard to imagine compound interest raising anyone much of a fortune these days. A hundred-dollar account at 5 percent in simple interest doggedly adds five bucks each year: you have $105 after one year, $110 after two, and so on. With compound interest, that interest itself get rolled into the principal and earns interest atop interest: with annual compounding, after one year you have $105, after two you have $110.25. Granted, the extra quarter isn’t much; mathematically, compound interest is a pretty modest-looking exponential function.
Modest, that is, at first. Because thanks to an eccentric New York lawyer in the 1930s, this college in a corner of the Catskills inherited a thousand-year trust that would not mature until the year 2936: a gift whose accumulated compound interest, the New York Times reported in 1961, “could ultimately shatter the nation’s financial structure.” The mossy stone walls and ivy-covered brickwork of Hartwick College were a ticking time-bomb of compounding interest—a very, very slowly ticking time bomb. 
One suspects they’d have rather gotten a new squash court....MUCH MORE

Monday, March 2, 2015

Oaktree's "Howard Marks on Luck and Skill in Investing"

We are fans.

From Advisor Perspectives:
When Howard Marks graduated from the Booth School of Business of the University of Chicago, he was turned down for the one job he really wanted. That, he said, was the luckiest moment of his career. The firm that turned him down was Lehman Brothers.

Marks is the co-chairman and founder of Oaktree Capital Management. He spoke to an audience of investment professionals and MBA students at the annual MIT Sloan Investment conferencein Cambridge on February 20th.

His talk was moderated by Randy Cohen, a senior lecturer at the Sloan School. Marks and Cohen discussed a range of topics, including his luck and skill in career choices, the lack of efficacy in forecasting, the importance of second-level thinking, investing in the current interest rate environment and the ingredients for investment success.

On luck and skill in career choices
Marks said he was not the kid who started reading prospectuses at nine years old and then invested his bar mitzvah money. Before deciding on a career in finance, he considered being a history professor, an architect, an advertising man and an accountant. Before graduating from the University of Chicago, he interviewed for jobs in corporate treasury, banking, investment management, investment banking, accounting and consulting.
But he got lucky when he was turned down for the one job he was sure he wanted. Marks recounted that the recruiter had decided to hire Marks, but the partner in charge of making the final hire came in to work hung over that morning. He offered the job to the wrong guy. If it wasn’t for that piece of bad luck, he said, he could have spent the first 30 years of his career at Lehman Brothers, ultimately ending up with nothing for whatever equity stake he might have earned.

Luck is very important, according to Marks, and he advised the future MBAs to “put themselves in the way of good luck” as opportunities only come around once in a while and you have to take them.

On the lack of efficacy in forecasting
Forecasters have been very poor and consistently so, Marks said. In the summer of 2013, forecasters unanimously predicted that rates would go up after Federal Reserve Chairman Bernanke started talking about tapering. This was the most important decision in 2013 and most forecasters got it wrong as rates went down. He credited Jeffrey Gundlach at DoubleLine for being one of the few who got this decision right.

The most important decision of 2014 was the price of oil; very few forecasters got that right either. Marks advised giving up on the forecasting game and taking a more humble approach to fore knowledge. When he is asked what is going to happen to the price of oil, he said, the only correct answer is, “I don’t know.” Oil is an asset that does not produce cash flow, and it has not sold at a free market price. Since it is an administered price, he knows it will be unpredictable.

While Marks warned about forecasting, he said that you can’t invest without making some judgments about the future. Marks said that Oaktree invests in the areas that are under pressure. In the last four months those areas have been oil and oil-servicing companies. “Value investors proudly invest in assets based on the discounted price of future cash flows,” he said.

Do not invest in companies where their future is heavily dependent on the price of oil, Marks warned, because it is so unpredictable. Instead, he advised investing in companies that “can survive in a broader range of outcomes because the [oil] environment is so bizarrely uncertain.”

In periods when the markets do not change dramatically, most investors get it right most of the time but it does not make them any money. It is very valuable to forecast radical changes, as in the case of oil prices, but most people don’t get this right and this makes forecasting so unavailing. When something radical happens, someone gets it right, but Marks asks himself did this person get anything else right before or after, or do they just take extreme positions? 

Marks quoted Mark Twain, “It’s not what you don’t know that gets you in trouble but what you know for certain that just ain’t true.”...MORE
Possibly also of interest:
Knowledge@Wharton Visits With Oaktree's Howard Marks
Oaktree's Howard Marks: "The Lessons Of Oil"
Oaktree's Howard Marks: "Dare To Look Wrong, It's Not Supposed To Be Easy"
Oaktree Capital's Howard Marks Says the 'Bond Bubble' Has Much Further to Run
Bull and Bear Markets, According to Oaktree’s Howard Marks

"Citi Warns That QE May Be Deflationary"

See also: FT Alphaville in 20-freaking-11 (and possibly earlier).*
Citi takes a different route to get there but the result is just as paradoxical.

From ValueWalk:

Citi analyst Mark King worries that QE won't drive productive investment but will prevent unhealthy firms from going under
The European Central Bank is starting QE this month in order to fight deflation, so it must be at least a little unsettling when Citi comes out with a new report titled “Is QE Deflationary?” While Citi analyst Mark King acknowledges that US and UK wage growth, positive economic surprises in Europe, and lending growth are all encouraging, but he’s not convinced that the news is as good as it seems.

“Lower oil prices, 18 central bank easings in the past three months, and record lows in bond yields. It all ought to prove highly stimulative. Yet we doubt that the sixth trillion of QE will succeed where the first five have failed,” he writes.
US and global HY spreads QE
QE doesn’t deal with overcapacity
If companies are turning deciding not to make productive investments because financing is too expensive, then pulling down that cost should lead directly to higher capex. But if companies don’t see anything attractive to do with their cash, record low interest rates won’t make any difference. Companies will still make use of the low rates for refinancing old debt, stock buybacks, and the like, but cheap credit can’t make interesting projects suddenly appear.

King takes this argument a step further. If the world is under deflationary pressure caused by overcapacity, then allowing weak companies that would normal go bust to refinance and scrape by actually makes the problem worse. As investors get ever more desperate for yield, risky companies find it easier to issue new debt. You can also see the effect of oversupply in commodities prices, which have been falling for the last two years even if you ignore headline-stealing oil prices....

*August 11, 2011
When a government bond becomes a Giffen good

Re-ref'd in 2013's
Is QE deflationary or not?
We first proposed the idea that QE could be (but wasn’t necessarily) deflationary a couple of years ago. It was dubbed a counter-intuitive idea by Tyler Cowen.

More recently, a similar proposition has been made by Stephen Williamson — though this time using models and proper math. His view is a little different to ours because it’s less focused on the safe asset squeeze and more on the conditions that generate a preference for cash over yielding paper in the first place. Hint: you have to think the purchasing power of cash will go up regardless....
Also Aug. 2012:
The unintended consequences of QE: not what you think

And our series picking on the commenters at Marginal Revolution linked in:
Marginal Revolution's Tyler Cowen: "...Kaminska Wins"

"$4 Million In Gold Bars Stolen In 11th Largest Heist In History"

From ZeroHedge:

Long-time Zero Hedge readers may remember the rather surreal moment towards the beginning of the long-running German tungsten/gold repatriation saga, when Bundesbank Executive Board member Andreas Dombret assured the NY Fed that Germany wasn’t afraid of Simon Gruber (or Goldfinger for that matter) “masterminding gold heists in U.S. vaults.”

Well, since it now appears Germany is all set to ramp up its repatriation efforts (see the NY Fed’s November monthly outflow numbers), Buba may want to reconsider its stance on the threat posed by ambitious bandits, as less than 24 hours ago, an estimated 4 million in gold bars were commandeered (on the side of I-95 no less), by gun wielding desperados.
From CBS:
North Carolina authorities and the FBI are investigating the theft of an estimated $4 million worth of gold allegedly stolen during an armed robbery along Interstate 95 on Sunday evening, CBS affiliate WRAL reports.

After mechanical problems with their truck, two armed guards who were traveling from Miami to Massachusetts with a shipment of silver and gold pulled over at mile marker 114 on the Interstate....MORE
As the old time British nature shows used to say when the lions approached the wildebeests:
"Sadly now, there can be but one outcome"

What a Long Strange Trip: 'Misery Index' Hits Lowest Level Since 1959

From Real Time Economics:
We’re at our Lowest Level of Misery in 56 Years, Thanks to Gas Prices 
By one measure, the U.S. economy is the best it’s been since the presidency of Dwight Eisenhower. The recent plunge in inflation has helped drive the U.S. Misery Index to its least miserable level since the spring of 1959.
The Misery Index was proposed by the economist Arthur Okun in the 1970s, while he was a scholar at Washington’s Brookings Institution. When Mr. Okun proposed the index, the U.S. was in the grip of stagflation — a period of both high unemployment and high inflation. To capture the era’s misery, Mr. Okun (who had been on Lyndon Johnson’s Council of Economic Advisers) proposed simply adding the unemployment rate and the annual inflation rate into a new number.

The index captured the economic anxiety of the time. Not only were many people struggling to find work in the 1970s, they were also grappling with accelerating price gains. The Misery Index reached an apex of 21.9 in May of 1980 when the unemployment rate was 7.5% and the inflation rate was 14.4%, as measured by the Consumer Price Index. The inflation of the era was finally brought under control when Federal Reserve Chairman Paul Volcker pushed interest rates as high as 20% to throttle the price gains. Inflation came down quickly, unemployment followed it down a few years later, and the U.S. settled in for two mostly good economic decades in the 1980s and 1990s....MORE
Additional analysis from Jerome Garcia:

"Annotating the Oracle: Experts Weigh In on Berkshire’s Annual Letter"

Two quick points:
1) I won't be weighing in, it's just not as much fun as it was 25 years ago when you could still elicit a "Warren who?"
2) This is a pretty slick way to attract what we used to call, back in the day, "sticky eyeballs".

From MoneyBeat:
This year’s letter from Warren Buffett to the shareholders of his Berkshire Hathaway Inc. has been 50 years in the making. The famed “Oracle of Omaha” looked back over the decades to reflect on Berkshire’s success–and peered into his crystal ball to see what lies ahead.

One thing about the letter was clear above all: It wasn’t written solely for Berkshire’s current shareholders. Mr. Buffett was writing for Berkshire’s future leaders, giving a roadmap of how the massive conglomerate got here, and providing signposts to help get where it’s headed next. It’s a document he expects will be part of the conversation about the company for decades to come.

The Wall Street Journal brought together a collection of three dozen Buffettologists, Berkshire shareholders, value investors and academics to help readers better understand the 25,000 word manuscript, which also includes a terse–but newsworthy–four-and-a-half pages from Berkshire’s vice chairman, Charlie Munger.
You can see the notations by clicking on the portions of the text marked in yellow in the window below. For those settling in to read the entire document, click the box in the lower left corner of the window below for a full-screen view and more navigation options....MORE

"SEC Suspends Trading in 128 Dormant Shell Companies"

Long time readers know this part of the market holds a sick intrigue for your correspondent.*
From FT Alphaville:

Slaughter of the shells
Officials from the SEC have been out with axes and clubs across 24 states and also Canada, effectively putting 128 inactive penny dreadfuls or Pink Sheets out of their corporate misery.

Trading suspensions on Monday brought the number of micro cap companies suspended since the regulator began Operation Shell-Expel in 2012 to 800 — some 8 per cent of the OTC market, where all these previously traded.

The idea, of course, is to clear away those market vehicles that might be used in pump and dump operations. Once an OTC stock has been suspended, it can’t come back without a proper financial and operational update, and that rarely happens. So trading halts like these tend to be terminal....MORE
Way back in 2008 I recited some of the history:

Chameleons on the Pink Sheets
On April 22 I was rambling about Planktos and penny stock deals:

...A classic history would be a Vancouver "junior resource" company in 1979, after the collapse of the oil and gold markets became a solar deal in '81 , an Aloe Vera deal to the yuppies mid '80's, a biotech in '86 ("we're the next Amgen"or "A cure for AIDS"), then on to neutraceuticals or spas, Indian casinos, software, then the great "i", "e-" and ".com" gold rush. Someday I'll get around to checking if some lunatic scammer actually went with "e-iTrade.com".

The next group of parasites were the "homeland security" companies, then land deals. The "resource" scams never went away and became more prominent in 2002 after gold had moved off its $252 bear market low. We're in the Green boom (happy Earth day by the way) now, who knows what's next....

Today in EuroInvestor:

...The recently re-named Homeland Security Network, Inc. (Pink Sheets:HYSN), doing business as Global Ecology Corporation (GEC) announced today that it has received their initial order from its soil remediation project in Juarez, Mexico. The total value of the purchase orders, involving several of the partnerships soil-based products, is $2 million with delivery to begin this June....
See also:
London's Russian IPO's
Junior Gold Miners Consider Cashing Out, Pursuing Medicinal Marijuana Opportunities
SEC Approves Eight Russian Shell Companies (AMOK.OB)
Better Get The Leg Irons Boys.
These Ain't Regular Criminals,
These is Stockbrokers.
-One of Climateer's favorite Barron's headlines.
Oh happy day.
Long time readers know I have a morbid fascination* with the underbelly of the markets; it's like watching the lions approach the wildebeest at the watering hole, you don't want to see it but you can't look away.

As they say on the nature shows:
"Sadly now, there can be but one outcome"... 
The Law Firm That Supplies Shell Companies To Oligarchs, Money Launderers, and Dictators
A Look at the Old Shell Game: Reverse Mergers From China and Russia (CGA; SGAS; QING; AGVO; AMOK)
Tax Havens--"Kenya: want a shell company? No question"
Money Laundering With Inga Slavska and the Sinaloa Cartel

Genworth Finds Material Weakness In Its Long Term Care Accounting (GNW)

The old joke is "People become actuaries because they don't have the charisma to become accountants".
Here you might substitute "brains".
Additionally GE is looking damn smart for spinning it out in 2004 whereas hedgie John Paulson is looking pretty dumb.
$7.32 down 5.55%.
From Bloomberg:
Genworth Financial Inc., the insurer that posted two straight quarterly losses tied to reserve shortfalls at its long-term care unit, said it found a material weakness in its accounting for the coverage.

“We are currently working to remediate the material weakness,” the Richmond, Virginia-based company said in a regulatory filing. “We did not have adequate controls designed and in place to ensure that we correctly implemented changes made to one of the methodologies as part of our comprehensive long-term care insurance claim reserves review.”

The disclosure adds to challenges for Chief Executive Officer Tom McInerney after the company was stripped of its investment-grade credit rating and shares dropped by half in the 12 months through Friday. An Australia mortgage insurance unit, which the company had highlighted as a strong performer, had its outlook cut to negative by Moody’s Investors Service on Feb. 20 after announcing the end of a deal with Westpac Banking Corp.

The insurer said in the filing that it initially failed to identify a $44 million calculation error tied to a review of long-term care reserves. The company said it’s working to fix the problem by separating actuarial teams and by expanding the scope of reviews when it changes assumptions or methods. Genworth said it plans to fix the problems this year.

The shares dropped after Genworth disclosed the weakness, losing 8 percent to $7.13 at 2:03 p.m. in New York.

Genworth posted net losses of $844 million in the third quarter of last year and $760 million in the fourth. The day after the latter report, Chief Financial Officer Marty Klein told investors that the company was assessing whether there were accounting shortcomings.

Nursing Homes
Long-term care coverage helps pay for home-health aides and nursing home stays. Some customers pay premiums for decades before the insurer knows if it will incur claims costs.

Accounting for the contracts involves periodically reevaluating the percentage of policyholders who submit claims and the cost per person. Lower interest rates also force the company to change profitability assumptions, because they mean that insurers earn less on bonds held to back obligations....MORE

Sunday, March 1, 2015

Nudge This: "Yes, You’re Irrational, and Yes, That’s OK"

I don't care much for manipulators.
For a time however I tried to work the word into every conversation. I knew a finance guy who, for whatever reason, could not say the word, when he tried it came out as 'nipulators.'
I loved it when he'd go on a rant about the nipulators and nipulation, I'd egg him on and just melt when he got going.
Good times.

From Nautil.us:

The insight that will save you from being manipulated.
Imagine that (for some reason involving cultural tradition, family pressure, or a shotgun) you suddenly have to get married. Fortunately, there are two candidates. One is charming and a lion in bed but an idiot about money. The other has a reliable income and fantastic financial sense but is, on the other fronts, kind of meh. Which would you choose?

Sound like six of one, half-dozen of the other? Many would say so. But that can change when a third person is added to the mix. Suppose candidate number three has a meager income and isn’t as financially astute as choice number two. For many people, what was once a hard choice becomes easy: They’ll pick the better moneybags, forgetting about the candidate with sex appeal. On the other hand, if the third wheel is a schlumpier version of attractive number one, then it’s the sexier choice that wins in a landslide. This is known as the “decoy effect”—whoever gets an inferior competitor becomes more highly valued.

The decoy effect is just one example of people being swayed by what mainstream economists have traditionally considered irrelevant noise. After all, their community has, for a century or so, taught that the value you place on a thing arises from its intrinsic properties combined with your needs and desires. It is only recently that economics has reconciled with human psychology. The result is the booming field of behavioral economics, pioneered by Daniel Kahneman, a psychologist at Princeton University, and his longtime research partner, the late Amos Tversky, who was at Stanford University.
It’s all about leveraging the unconscious factors that drive 95 percent of consumer decision-making.
It has created a large and growing list of ways that humans diverge from economic rationality. Researchers have found that all sorts of logically inconsequential circumstances—rain, sexual arousal (induced and assessed by experimenters with Saran-wrapped laptops), or just the number “67” popping up in conversation—can alter the value we assign to things. For example, with “priming effects,” irrelevant or unconsciously processed information prompts people to assign value by association (seeing classrooms and lockers makes people slightly more likely to support school funding). With “framing effects,” the way a choice is presented affects people’s evaluation: Kahneman and Tversky famously found that people prefer a disease-fighting policy that saves 400 out of 600 people to a policy that lets 200 people die, though logically the two are the same. While mainstream economists are still wrestling with these ideas, outside of academe there is little debate: The behaviorists have won.

Yet for all their revolutionary impact, even as the behaviorists have overturned the notion that our information processing is economically rational, they still suggest that it should be economically rational. When they describe human decision-making processes that don’t conform to economic theory, they speak of “mistakes”—what Kahneman often calls “systematic errors.” Only by accepting that economic models of rationality lead to “correct” decisions, can you say that human thought-processes lead to “wrong” ones.

But what if the economists—both old-school and behavioral—are wrong? What if our illogical and economically erroneous thinking processes often lead to the best possible outcome? Perhaps our departures from economic orthodoxy are a feature, not a bug. If so, we’d need to throw out the assumption that our thinking is riddled with mistakes. The practice of sly manipulation, based on the idea that the affected party doesn’t or can’t know what’s going on, would need to be replaced with a rather different, and better, goal: self knowledge....MUCH MORE

"Self-Aware? World's Largest Hedge Fund Shifts Strategy To Artificial Intelligence"

From ZeroHedge:
Despite warnings from the likes of Elon Musk and Stephen Hawking (and of course, Sarah Connor), Ray Dalio's $165 billion AUM hedge fund Bridgewater will start a new, artificial-intelligence unit next month. Despite the "new normal"'s total reversal of any and every historical rational trading pattern, the unit will attempt to create trading algorithms that make predictions based on historical data and statistical probabilities, as "machine learning is the new wave of investing for the next 20 years and the smart players are focusing on it." Does this mean the talking heads of CNBC, with their 'memes', 'myths', and 'mumbling' rationales for it always being a good time to buy are now obsolete? Or did the market just become self-aware?

As Bloomberg reports,The world’s largest hedge fund manager is banking on machines...
Ray Dalio’s $165 billion Bridgewater Associates will start a new, artificial-intelligence unit next month with about half a dozen people, according to a person with knowledge of the matter. The team will report to David Ferrucci, who joined Bridgewater at the end of 2012 after leading the International Business Machines Corp. engineers that developed Watson, the computer that beat human players on the television quiz show “Jeopardy!”

The unit will create trading algorithms that make predictions based on historical data and statistical probabilities, said the person, who asked not to be identified because the information is private. The programs will learn as markets change and adapt to new information, as opposed to those that follow static instructions. A spokeswoman for Westport, Connecticut-based Bridgewater declined to comment on the team. 
“Machine learning is the new wave of investing for the next 20 years and the smart players are focusing on it,” Dolfino said....MORE

"China is building some "fairly amazing submarines" and now has more diesel- and nuclear-powered vessels than the United States"

From Reuters:

China submarines outnumber U.S. fleet: U.S. admiral
China is building some "fairly amazing submarines" and now has more diesel- and nuclear-powered vessels than the United States, a top U.S. Navy admiral told U.S. lawmakers on Wednesday, although he said their quality was inferior.

Vice Admiral Joseph Mulloy, deputy chief of naval operations for capabilities and resources, told the House Armed Services Committee's seapower subcommittee that China was also expanding the geographic areas of operation for its submarines, and their length of deployment.

For instance, China had carried out three deployments in the Indian Ocean, and had kept vessels out at sea for 95 days, Mulloy said.

"We know they are out experimenting and looking at operating and clearly want to be in this world of advanced submarines," Mulloy told the committee....MORE

The HT goes to Next Big Future who has some context

Saturday, February 28, 2015

"Live Analysis: Warren Buffett’s Annual Berkshire Letter" (BRK)

As I note the early AM timestamps I am reminded of a 2008 post from MoneyBeat's predecessor, MarketBeat:
The 5 a.m. Buffett Breakfast Club
They’re rich. They’re cheerful. They’re morning people.
An awesome piece from MoneyBeat:
The annual missives that billionaire investor Warren Buffett writes to shareholders of his Berkshire Hathaway Inc. are always carefully scrutinized by big-name investors and small-time stock-pickers alike. But this year’s letter promises to get even more attention.
That’s because this year’s letter has been five decades in the making.
It was in 1965 that Mr. Buffett and his vice chairman, Charlie Munger, took over a troubled textile company called Berkshire Hathaway and began transforming it into the massive conglomerate it is today. Along the way, the “Oracle of Omaha” has amassed a fortune, built a following, and become a celebrated figure in many corners of the world. Mr. Buffett has promised that this year’s letter would look back on the past five decades, and speculate on the next five.
The MoneyBeat team is providing analysis on the letter in real time as we read it Saturday morning. Join us as we dive in.
    • 6:07 am
    • Welcome
    Welcome aboard. The Berkshire letter due out in about an hour has been 50 years in the making, but it’s also been many months in the writing.
    In the very last paragraph of last year’s letter, Warren Buffett piqued the interest of his most ardent followers—the ones who read all the way to the end of his annual missives—with this line:
    Next year’s letter will review our 50 years at Berkshire and speculate a bit about the next 50.
    It wasn’t a promise Mr. Buffett took lightly. In December, Mr. Buffett told the Journal that he’s already written 20,000 words of the upcoming letter. In normal years, the letter runs about 15,000. We’re going to have a lot of reading to do today.
    • 6:11 am
    • Hearing from Munger
    Berkshire shareholders and those who follow the conglomerate’s activities will get a bonus this time around: Berkshire Vice Chairman Charlie Munger is also writing down his vision for Berkshire for the next 50 years. Shareholders love Mr. Munger’s sometimes bruising wit and deadpan delivery, but his voice has been absent from last letters.
    Mr. Buffett said in December that he and Mr. Munger had agreed not to read each other’s accounts until shortly before today’s publication. The letter will contain a note from Mr. Buffett stating that neither he nor Mr. Munger changed a word of commentary after reading the other’s piece.
    • 6:16 am
    • What to Expect
    So now that the letter is finally arriving this weekend, what can Berkshire shareholders and Buffett acolytes expect? We covered that in detail in this post on Friday, but we’ll hit some of the key point as we wait for the letter to land.
    (And don’t think we didn’t try to find the letter on Berkshire’s website already . It’s not there yet, but it should be at this link when it goes live.)
    • 6:19 am
    • Together or Apart?
    As he looks 50 years into the future, we expect Mr. Buffett will address the question of whether Berkshire should stay together–and perhaps, how it could be organized under his successor.
    At a time when more and more companies are spinning off operations to narrow their focus and make their operations easier to value, Mr. Buffett will likely say Berkshire works better as a conglomerate. Berkshire’s insurance units, including car insurer Geico Corp., fueled Berkshire’s growth over the past five decades by giving Mr. Buffett funds to invest elsewhere. Barclays analyst Jay Gelb said in a research note this week that Mr. Buffett is likely to argue that “excess cash from Insurance and other operations can be effectively and tax-efficiently deployed” to grow other parts of the company.
    That’s not unalloyed good news for all Berkshire shareholders. Some of them think the company is so massive that some crown jewels of the company aren’t being fully appreciated by the market. Mr. Gelb says that “means substantial value could remain unlocked for several major units.”

      • 6:25 am
      • About that Dividend
      How will Berkshire use its capital in the future? Mr. Buffett has made it clear that Berkshire is very unlikely to pay a dividend in his lifetime. He argues that he can use the money that would be spent on a dividend to grow Berkshire instead–and he has the track record to prove it.
      A small but vocal group of shareholders has long tried to push Mr. Buffett to pay one, but a vote on the topic at last year’s annual meeting was roundly defeated. In fact, it attracted so little support that it likely set back the cause.
      Yet at that same meeting, when asked what Berkshire will look like in 20 years, Mr. Buffett acknowledged that there would come a time when the company has more capital than it knows what to do with.
      “What I do know is that we will have more cash than we can intelligently invest in the future,” he said. “It’s not on a distant horizon. The number is getting up to where we can’t intelligently deploy the amounts coming in.”
      Does that mean Mr. Buffett could revisit the dividend question this weekend as he peers into his crystal ball? Perhaps. But he may instead focus on the topic of share repurchases. Berkshire has already instituted a program of buying back stock when shares fall below a specific target (which is adjusted each quarter). There’s a chance he could discuss Berkshire’s target and argue for making it less restrictive.
      • 6:34 am
      • The Next Buffett
      Mr. Buffett likes to joke that he’ll continue to run Berkshire via seance after he’s gone. Joking aside, though, the question of who will take over the role of chief executive is the biggest topic hanging over the company and its shareholders. Mr. Buffett has said it’s the most important thing that Berkshire’s board discusses when it meets.
      That said, the chances that Mr. Buffett will name his successor in the CEO role today are essentially zero. I’m confident making that prediction even though I could be proven horrible wrong in under half an hour. It’s just not going to happen....
    ...MUCH MORE

    In case you missed the link:
    Warren Buffett's Letters to Berkshire Shareholders
    Updated February 28, 2015

"Game Theory Calls Cooperation Into Question"

From the Simons Foundation's Quanta Magazine:

A vervet monkey will scream an alarm when a predator is nearby, putting itself in danger.
 A vervet monkey will scream an alarm when a predator is nearby, putting itself in danger.
A recent solution to the prisoner’s dilemma, a classic game theory scenario, has created new puzzles in evolutionary biology.

When the manuscript crossed his desk, Joshua Plotkin, a theoretical biologist at the University of Pennsylvania, was immediately intrigued. The physicist Freeman Dyson and the computer scientist William Press, both highly accomplished in their fields, had found a new solution to a famous, decades-old game theory scenario called the prisoner’s dilemma, in which players must decide whether to cheat or cooperate with a partner. The prisoner’s dilemma has long been used to help explain how cooperation might endure in nature. After all, natural selection is ruled by the survival of the fittest, so one might expect that selfish strategies benefiting the individual would be most likely to persist. But careful study of the prisoner’s dilemma revealed that organisms could act entirely in their own self-interest and still create a cooperative community.
Press and Dyson’s new solution to the problem, however, threw that rosy perspective into question. It suggested the best strategies were selfish ones that led to extortion, not cooperation.

Plotkin found the duo’s math remarkable in its elegance. But the outcome troubled him. Nature includes numerous examples of cooperative behavior. For example, vampire bats donate some of their blood meal to community members that fail to find prey. Some species of birds and social insects routinely help raise another’s brood. Even bacteria can cooperate, sticking to each other so that some may survive poison. If extortion reigns, what drives these and other acts of selflessness?

Press and Dyson’s paper looked at a classic game theory scenario — a pair of players engaged in repeated confrontation. Plotkin wanted to know if generosity could be revived if the same math was applied to a situation that more closely resembled nature. So he recast their approach in a population, allowing individuals to play a series of games with every other member of their group. The outcome of his experiments, the most recent of which was published in December in the Proceedings of the National Academy of Sciences, suggests that generosity and selfishness walk a precarious line. In some cases, cooperation triumphs. But shift just one variable, and extortion takes over once again. “We now have a very general explanation for when cooperation is expected, or not expected, to evolve in populations,” said Plotkin, who conducted the research along with his colleague Alexander Stewart.

The work is entirely theoretical at this point. But the findings could potentially have broad-reaching implications, explaining phenomena ranging from cooperation among complex organisms to the evolution of multicellularity — a form of cooperation among individual cells.

Plotkin and others say that Press and Dyson’s work could provide a new framework for studying the evolution of cooperation using game theory, allowing researchers to tease out the parameters that permit cooperation to exist. “It has basically revived this field,” said Martin Nowak, a biologist and mathematician at Harvard University....MORE
 Well, other than that what have you been up to?

"Private Bank Survey: Where to Invest Cash Now"

I know America has some fine private banks but when I hear the phrase it's always Pictet or Lombard Odier or Rahn that I think of. Personal quirk.
From Barron's:

America’s top 40 asset managers predict a grind in 2015.
What happens when asset managers believe that equities are still the best and perhaps only play in town, but that shares, particularly in the U.S., are close to being fully valued, and long-term bonds are risky? Answer: Cash positions spike, as wealth managers park money in cash or cash equivalents and wait for dips in the market before buying more stocks. 

“We think stocks are going to deliver reasonable returns. The problem is, you’re not going to get return from bonds, so we’ve put some risk mitigation into cash,” says Seth Masters, chief investment officer at Bernstein Global Wealth Management. 

There’s an important nuance here. The larger-than-normal liquid positions that we are spotting don’t mimic the defensive crouch seen in a recession. Rather, they are often cautious and temporary sideline holdings, awaiting the right buying opportunities. 

That, in essence, is where our 40 asset managers stood at the end of 2014, a story that can be found buried deep inside our asset-allocation table of America’s largest asset managers, on pages 28 and 29.
At first blush, allocations by the group of 40 haven’t changed much because of contradictory and uncertain views. Overall stock allocations average 51%, the same as a year ago, but U.S. stock holdings are up slightly, to 33% compared with 31% last year. Counterintuitively, with U.S. interest rates soon to rise, allocations in fixed income are also slightly higher this year -- at 27% versus 26% last year. 

But that’s our story: A good portion of those fixed-income holdings are due to asset managers quietly parking cash in “cash equivalent” short-term fixed-income instruments. Among them are a smattering of corporate bonds, commercial paper, and mortgage-backed securities, and a bigger proportion of asset-backed securities, such as those backed by consumer loans, mortgage-servicing fees, and communication-tower lease revenues.
JPMorgan Chase, Highmount Capital, Wilmington Trust, and Barclays are some of the wealth managers that have increased cash or cash-equivalent investments in this way. Consider Brown Brothers Harriman, which had 27% in cash and equivalents on hand at year-end 2014, by far the largest stash -- some to offset risk, but most on hand to deploy on market dips, says the firm’s chief investment strategist, Scott Clemons. 

Here is why Clemons’ cash position isn’t easy to spot in our table: Brown Brothers has just 3% in pure cash, but it has quietly shifted 24% of its portfolio into ultrashort-term instruments that are lumped into the firms’ fixed-income bucket. 

It’s an opportunistic holding. When the oil-price collapse triggered a fall in shares in early December, Brown Brothers added modestly to stockholdings. With cash levels still over 20%, Clemons said he is poised to pounce further into emerging markets, encouraged by temporary oil-price-induced weaknesses. Brown Brothers Harriman is not alone. Among other firms with cash embedded in their fixed-income allocations are Genspring, with 8% of its total portfolio; Atlantic Trust, with 9%; and Barclays, with 7%. It raises the question: Why?

BLAME IT ON UNCERTAINTY. Wealth managers are all privy to the same data, but they’re coming up with very different conclusions about the meaning for investors. It’s a sign of abnormal times.

“Earlier in the recovery cycle, people were more certain in their allocations and there was more uniformity in outlooks, but now everyone realizes growth isn’t bouncing back as it has historically,” says Bruce McCain, chief investment strategist at Key Private Bank. “Since you can’t frame what’s going on based on historical trends, you get a wider range of ideas about how to exploit what’s happening.” 

Barron’s annual asset-allocation survey typically finds strong majority opinions, such as last year’s 75% that backed an increase in foreign developed stocks. But in this year’s survey, for which data were gathered in December, only U.S. stocks got a thumbs up, with 56% of wealth managers recommending adding a touch more. In other asset classes, a roughly equal number of wealth managers were positive or negative....MORE

Friday, February 27, 2015

In Which Bloomberg's Matt Levine Goes All "Let's Use Words Correctly, Class" On Us

Not that there's anything wrong with that.*
Following up on this morning's "Meet The Dumbest Insurance Company In The World And the 68.6% Annual Return".

From Bloomberg:

Arbitrage Discovered
Webster's New World College Dictionary defines "arbitrage" as "a simultaneous purchase and sale in two separate financial markets in order to profit from a price difference existing between them," but who reads dictionaries, come on.   The practical definition of "arbitrage," at least in the marketing of financial products, is "a thing we think we can make money doing, keep your fingers crossed." So when someone comes to you and offers you a thing called a "Fixed Price Arbitrage Life Insurance Contract," he's not actually offering you the ability to buy and sell the same thing at different prices, locking in a risk-free profit. It's not actually an arbitrage.

Life insurance is a popular savings product in France, and typically the customer allocates their money among different investment funds offered by the insurer. But this contract was not typical: prices for the funds were published each Friday, and clients were allowed to switch funds at those prices anytime before the next price was published, even if markets moved in the meantime.
L’Abeille Vie called this an arbitrage, but really it was a gift. Is the stock market up this week? Just call your broker to buy it at last week’s price and pocket the difference.
That's from Dan McCrum at FT Alphaville, and while I suspect that most of my readers who enjoy a good derivatives-mispricing yarn also read Alphaville, I figured I'd point it out here because it is the best of all derivatives-mispricing yarns, and I would hate for anyone to miss it. So go read him, and/or the French magazine -- aptly named "Challenges" -- that first reported this....MUCH MORE, including four footnotes:
  1. Webster's is a little weird on this point. I quoted definition 1 in the text, but definition 2 is "a buying of a large number of shares in a corporation in anticipation of, and with the expectation of making a profit from, a merger or takeover." That normally goes by the name "merger arbitrage," or the delightfully paradoxical "risk arbitrage"; in my idiolect you can't just call it "arbitrage." But you see why Webster's would put it there, because otherwise "merger arbitrage" becomes incomprehensible.
*I've been known to go off on this issue myself:

1. 2013's "My Second-to-Last Comment on Izabella Kaminska at Tyler Cowen's Marginal Revolution":

 ....steve May 3, 2013 at 12:28 pm
I was taking the article half seriously when I read the “end of arbitrage”. All I can say is this marks it as quackery. Oh sure, arbitrage may end up being primarily the domain of computers working at lightning speeds. But, the end? Hogwash, there will never be perfect markets.
People, people, people arbitrage opportunities have been disappearing for the past 150 years!

I guessing the two commenters didn't have the definition: "The simultaneous purchase and sale of the same instrument in different markets at different prices" pounded into their head so often their ears bled.
I did.
How many arbitrages do they think present themselves each year?

Spotting and acting on an arb is pure alpha and here is a dirty little secret:
The entire amount of alpha available to the entire hedge fund industry is only $30 billion per year.
As reported by a hedge fund maven via Investment News back in 2006:
...PHILADELPHIA - Everyone in the crowd assembled for the CFA Institute's hedge fund conference took notice when David S. Hsieh said that the amount of alpha available in the hedge fund industry each year is $30 billion.

Mr. Hsieh, a professor of finance at the Fuqua School of Business at Duke University in Durham, N.C., presented a synopsis of his ongoing research, which focuses on the style, risk and performance evaluation of hedge funds, at the Feb. 16 conference here. As part of his work, Mr. Hsieh questioned whether flows into hedge funds are causing a decline in hedge fund returns and what might happen if the high rate of inflow continues.

Because of difficulties in obtaining reliable hedge fund data, Mr. Hsieh used fund-of-hedge-funds data and broke down returns into alpha and beta sources. He said the research led him to "feel comfortable" determining that there is a finite amount of alpha - conservatively, $30 billion - managed by the approximately $1 trillion hedge fund industry. And even if capital invested in hedge funds were to rise, the amount of alpha would remain the same.... 
Got that? All alpha not just arbitrage but all alpha was just $30 bil. in '06.
Here's CBS MoneyWatch in March 2013:
Hedge funds are too big to beat the market
This is probably just a definitional problem so let's say it plainly:

In so called risk (merger) arbitrage the emphasis is on the first word.
Cash-and-carry, buying physical and shorting a derivative is not arbitrage.
When people use the term "arbed away" when talking about market anomalies the are not talking about an arbitrage.
Shorting an ETF and buying the component equities is not an arb, it's just a hedged trade.
Same for Index Arbitrage.

The total pool of arb opportunities may be as small as $1 billion.
Even the old Royal Dutch and Shell Transport trade was not an arb, just a fairly good pair trade.....MORE

2. 2012's "Arbitrage: Historical Perspectives"

3. 2014's "Gold and Backwardation or: Why to Hate Izabella de Alphaville"
The faux-eastern-European sounding sub-head is to honor one of her commenters at Dizzynomics who thought that, because of her last name (technically feminine adjectival surname, I looked it up), she was an English-as-a-second-language émigré from points east.*
That's pretty funny.

The hate terminology comes from the fact that I was dithering whether to link to the piece that is the basis for her post "The time value of gold and anything" while she was using it as a take-off for some fancy commodities-and-more writing. From Dizzynomics.....
4. 2014 again: "As John Paulson Discovers Once Again: Risk-arbitrage Is Pronounced with the Accent On the First Syllable"

5. 2011 "Glencore: The Perfect Arbitrageur"
6. 2011 "Mispricing of Dual-Class Shares: Profit Opportunities, Arbitrage, and Trading"
7. 2007 "How Buffett Made a Killing in Chocolate, And Warren's Letters to Shareholders":
Warren on arbitrage:
Some offbeat opportunities occasionally arise in the
arbitrage field. I participated in one of these when I was
24 and working in New York for Graham-Newman Corp.
Rockwood & Co., a Brooklyn based chocolate products
company of limited profitability, had adopted LIFO
inventory valuation in 1941 when cocoa was selling for
50 cents per pound.In 1954 a temporary shortage of cocoa caused the price to
soar to over 60 cents. Consequently Rockwood wished to
unload its valuable inventory - quickly, before the price
dropped. But if the cocoa had simply been sold off, the
company would have owed close to a 50% tax on the proceeds.

The 1954 Tax Code came to the rescue. It contained
an arcane provision that eliminated the tax otherwise due
on LIFO profits if inventory was distributed to shareholders
as part of a plan reducing the scope of a corporation’s business.
Rockwood decided to terminate one of its businesses, the sale
of cocoa butter, and said 13 million pounds of its cocoa bean
inventory was attributable to that activity. Accordingly, the
company offered to repurchase its stock in exchange for the
cocoa beans it no longer needed, paying 80 pounds of beans
for each share.

For several weeks I busily bought shares, sold beans, and
made periodic stops at Schroeder Trust to exchange stock
certificates for warehouse receipts. The profits were good
and my only expense was subway tokens....
And many more.
And apparently, for some reason the FT Alphaville journalist Izabella Kaminska makes me think of  arbitrage.
All together now: "The only perfect hedge is at Sissinghurst":