Thursday, September 18, 2014

Al Qaeda Offshoot Says It Hijacked A Pakistani Navy Ship to Attack U.S. Vessels

From Reuters via gCaptain:
File photo of PNS Zulfiqar courtesy Wikimedia Commons
File photo of PNS Zulfiqar courtesy Wikimedia Commons
Al Qaeda’s South Asia wing has claimed responsibility for hijacking a Pakistani naval ship and trying to use it to fire rockets at U.S. vessels in the Arabian Sea, in the first major assault by the newly created group.
The SITE monitoring service quoted its spokesman, Usama Mahmoud, as saying a group of militants had succeeded in seizing control of the Pakistani frigate PNS Zulfiqar and tried to use it to attack nearby U.S. vessels.

“These mujahideen had taken control of the Pakistani ship, and they were advancing towards the American fleet when the Pakistani army stopped them,” he said.

“As a result, the mujahideen, the lions of Allah and benefactors of the Ummah, sacrificed their lives for Allah, and the Pakistani soldiers spoiled their hereafter by giving up their lives in defence of the enemies of the Ummah the Americans.”...MORE
Roger that, lions of Allah thwarted, over.

Scotland Votes: Scenes From the Run-up

From TomoNews:

Next on TomoNews: Armpit hair selfies sweeping China

Handy Interactive Real Interest Rate Charts for Various Nations

From Dollar Collapse:
The folks at Gresham’s Law just published a nifty interactive chart of real (i.e., inflation-adjusted) interest rates since the 1960s that explains a lot about today’s world.
Real interest rates
To make sense of this, let’s start with a a little background: Interest rates are the rental cost of money, but to figure out the true cost you have to adjust the nominal (or numerical) interest rate for inflation, which is the rate at which the currency being borrowed is falling in value. 

If the nominal interest rate is higher than inflation, then the real interest rate is positive. If the real rate is both positive and high, that’s a signal that money is expensive and that one is better off being a lender (to reap those high returns) than a borrower (who has to pay the high true cost of money). The opposite is true for negative real rates, where the nominal cost of money is lower than the rate at which the currency is being depreciated. In this case a borrower actually gets paid to borrow because the true cost of the loan falls as the currency loses value. So negative real rates tell market participants to borrow as much as possible.
Given these incentives one might expect the following....MORE
Here are the charts, based on OECD data.

"How Often Do Stocks and Bonds Decline at the Same Time?"

From A Wealth of Common Sense:
Earlier in the year many investors were under the impression that something had to give because stocks and bonds were both rising.  I looked at the historical data on positive stock and bond returns to show that this is more common than most investors assume:
Stocks Bonds Rise Together
Since performance has been so strong in both stocks and bonds during this cycle, the chorus continues to grow for lower returns going forward for both, something that’s not out of the realm of possibilities. This brings up the question about how often stocks and bonds decline at the same time to prepare for the possibility.

It’s actually extremely rare on an annual basis historically when looking at the S&P 500 and 10 year treasuries from 1928 to 2013:
Down yrs stocks bonds
It’s only happened three times and the last occurrence was in 1969. That’s less than 4% of all annual periods, an impressive record.
Breaking it down a little further, when we look on a quarterly basis, stocks and bonds have fallen together more often.  Going back to 1976, using the more diversified Barclays Aggregate Bond Index, here are the 14 instances where both fell:
Down yrs stocks bonds 2
That means about 9% of all quarterly periods saw both go down together....MORE

Credit Suisse's Mauboussin: "We believe that some of the lessons of freestyle chess are useful...."

The quote goes on:
"...Properly done, a melding of fundamental and quantitative methods may well yield better results than either of them on their own”
From ValueWalk:
Credit Suisse managing director Michal Mauboussin argues that freestyle chess suggests a better way to combine quant and fundamental investment strategies

It’s been a long time since humans have been able to hold a candle against top chess programs, Kasparov famously lost to Deep Blue back in 1997 and amateurs have been losing to computers for even longer, but that doesn’t mean that people have become obsolete. Freestyle teams, which combine human and computer players, are still consistently better than machines playing on their own.

“We believe that some of the lessons of freestyle chess are useful. Properly done, a melding of fundamental and quantitative methods may well yield better results than either of them on their own,” write Credit Suisse managing director Michael Mauboussin and VP Dan Callahan in a September 10 report. “If we had to say which camp had the most to gain from the other, we’d say that the fundamental analysts have more to learn from the quants than the other way around.”

Process beats skill in freestyle chess One of the early lessons from freestyle chess is that the skills necessary to win change dramatically as soon as you bring a machine into the mix. In 2005 Zackary Stephen and Steven Cramton, neither of whom is a chess expert by ELO ranking, beat grandmaster Vladimir Dobrov and another highly ranked player to win a freestyle tournament. Without computer assistance Stephen and Cramton wouldn’t have had a prayer, so what changed?

Stephen and Cramton were credited with having a better process that let their different chess programs do the computational heavy lifting and only interjected with human judgment when those programs suggested different moves. Dobrov relied more on his own (impressive) chess skills and didn’t make the most of the software at his disposal.

Freestyle chess: parallel with fundamental and quantitative trading The obvious parallel that Mauboussin and Callahan are trying to draw is between fundamental and quant investment strategies, and they think both sides of the cultural divide has something to learn from the other....MORE

Realizing That Gold Is down $70 Thus Far In September, Barclays Cuts Forecast

"Il faut bien que je les suive, puisque je suis leur chef."*
Phrase historique prononcée à Paris - 1848

$1221.90 last, down 14 bucks.
From MarketWatch:
Gold loses luster on Fed; Barclays cuts forecast
Gold prices dipped Wednesday on concerns about a stronger dollar ahead of the Federal Reserve policy statement and in response to Barclays lowering its gold forecast.

But the precious metal may get a reprieve in the short term as the Fed’s statement, released after gold settled, reiterated that the central bank will keep interest rates low for a “considerable time” after it curtails its bond buying program.

Gold for December delivery GCZ4, -1.20%  ticked down 80 cents, settling at $1,236.70 an ounce.
As for the vote on Scotland’s independence, Edward Meir of INTL FCStone expects the “no” vote to prevail, but said markets could get dicey if it doesn’t.

“We do expect to see a massive short-covering rally in gold if Scotland votes ‘yes’, an event that should be momentous in terms of the economic fallout on both the U.K. and Europe,” Meir said.
Barclays bearish view on gold is linked to rising rates and the dollars strength. “Rising rates and a significantly stronger dollar present headwinds, which are set to overwhelm any seasonal strength in physical demand this year,” said Barclays’ analyst Suki Cooper.

With that, Barclays cut its fourth-quarter 2014 quarterly average forecast for gold to $1,220 an ounce and its average 2014 price to $1,270 an ounce. For 2015, the analysts see price risk skewed to the downside, with average prices set to reach only $1,180 an ounce.
*Schoolboy translation: "I must follow them for I am their leader."

"LA Schools Giving Up Grenade Launchers But Keeping the Tank"

What militarization?
From Curbed LA:
[Hollywood High via Michael Locke]
Aw, the LAUSD has to give up its three grenade launchers now that the public found about them and got all "Why does a school district need grenade launchers?" Still, as consolation prizes, they'll get to keep their mine-resistant vehicle and 61 M16 assault rifles, so they'll still easily be able to beat the students if it ever comes down to a full-scale battle (NOT THAT IT WOULD, we're assured). The Los Angeles School Police Department, LA County's fifth largest law enforcement agency, got the military equipment for free via the Pentagon's 1033 program, which hands out surplus equipment to domestic law enforcement agencies and "at least 22 school systems in eight states," according to the LA Times. The school district has had the weapons since 2001 and the tank for just a few months....MORE
The one that had me scratching my head was:
Why would police need 12,000 bayonets?

In the army the use of bayonets is infrequent enough that even the Scots can go a couple decades between charges.

Solar: Meet the New Boss, Same as the Old Boss (SCTY; SUNE; TERP)

Amid heartfelt We Shall Overcome's and speechifying about decentralized solar sticking it to the man-in the form of your local utility-is the dawning realization that the panels going on residential rooftops are owned by financial forces that are orders of magnitude larger than the utilities they replace.
From Bloomberg via Yahoo Finance:
Musk Solar Strategy Used as Model for Record Investments
Private equity and venture capital firms are pouring record investments into rooftop solar, following a model popularized by billionaire Elon Musk's SolarCity Corp. (SCTY) -- sell power, not panels. 

They're on pace to supply $5 billion this year for residential and commercial solar projects, up from $3.3 billion in 2013, according to the researcher Mercom Capital Group LLC.

The funds are going to companies such as Sungevity Inc. and Sunrun Inc. that sell electricity, a shift from the last boom year of 2008 when venture capital and private equity investors provided $4.97 billion, mostly for solar-panel factories. That helped spur a price war that bankrupted dozens of companies including Solyndra LLC. 

"It's become clear that it's a legitimate asset class, a legitimate source of electricity," said Tom Athan, a managing partner Altus Power America Management LLC. The Old Greenwich, Connecticut-based company finances commercial-scale solar projects and expects annual returns of 8 percent to 10 percent for the next several years from selling electricity.

"Questions from a few years ago -- ‘How do I know the sun is going to shine enough to make the amount of power you say?' or ‘What if the solar panels don't work?' -- nobody asks those anymore. They accept it's going to happen," he said. 

Rooftop Power
SolarCity transformed the industry by giving investors a way to take advantage of the declining cost of solar cells. Often for no money down, the San Mateo, California-based company installs panels atop homes and commercial buildings, leasing the systems back to property owners who save on their electricity bills. 

SolarCity's stock has increased more than eightfold since its December 2012 initial public offering, buoyed by strong demand from consumers seeking to produce their own electricity and reduce their monthly utility bills. That's outperformed Musk's better-known company, the electric carmaker Tesla Motors Inc. Musk is SolarCity's chairman and biggest shareholder. 

"We knew that in order to maintain quality and be able to scale, you have to build up your own infrastructure," said SolarCity Chief Executive Officer and co-founder Lyndon Rive. "Our competitors are now realizing that." 

Private-equity companies invested $2.4 billion in rooftop solar plants in the first half of 2014, and the total may reach $5 billion for the year, according to Austin, Texas-based Mercom.
‘Nice Returns'
"There are very nice returns to be had, especially given the scarce number of ways investors can really get good returns that don't have a lot of risk to them," said Cynthia Ringo, a managing partner at DBL Investors, a San Francisco venture-capital company....MORE 
Or maybe the realization isn't dawning. All the better.
Entrepreneur Trades Sex for Solar
Chasing Yield: The Solar Yieldco

Risk: "South China Sea Is Not Going Away Folks"

From BCA Research:
A poll of BCA Research Investment Conference attendees suggested that most investors are worried about Russia and the Islamic State, but investment-relevant risk remains in East and Southeast Asia.
I just got back to our Montreal HQ after two days at the BCA Research Investment Conference in New York. It is always great to catch up with old friends and make new ones at our annual event. It is also always an honor to share the same stage as our invited guests and my colleagues.

It is a tradition at our conference to ask the audience a few questions before we begin each panel. I began my Geopolitical Update presentation with two simple questions: which geographical region do you expect to produce the most investment-relevant risk in 2015; and do you think geopolitical risk will increase, decrease, or stay the same in 2015?

Unsurprisingly, a majority of the audience expected geopolitical risk to increase in 2015. No arguments there. But when it came to selecting the source of that risk, most of our clients and invitees expected it to come from Russia (first choice) or the Middle East (second choice). Only 14% respondents thought that East Asia would produce market-relevant geopolitical risk next year.

Here I respectfully – and considerably – disagree with our clients. While the probability of more tensions and noise from Russia and the Middle East remains high, the market impact of the two regional crises will likely remain muted. Meanwhile, East Asian geopolitical tensions continue to mount. The more investors ignore this region, the greater the likelihood that the market will be blindsided by a crisis.

Take this New York Times article from September 13 which reported that Malaysia had offered the U.S. a base from which to fly surveillance aircraft over South China Sea. The claim remains unconfirmed by Kuala Lumpur, but fits the pattern we have come to expect in the region where China’s neighbors are increasing military cooperation with the U.S....MORE
And from Xinhua, September 15:
CNOOC reports first deepwater gas discovery in South China Sea

Wednesday, September 17, 2014

Get to Know the Halophyte Crops

For now just a personal bookmark.
If the idea of greening deserts with canals of seawater pans out we'll be back with more.
From Aeon Magazine:
Ever since ancient times, the sowing of salt has been synonymous with severe and deadly retribution. The Roman general Scipio Africanus the Younger was said to have ended the Third Punic War in 146BC by razing Carthage, enslaving its population and spreading salt on its fields. In the biblical book of Judges (9:45), the brutal and unprincipled King Abimelech laid siege to the Canaanite city of Shechem. ‘He took the city,’ the biblical story says, ‘and slew the people that was therein, and beat down the city, and sowed it with salt.’
Salt kills most plants. In fact, it attacks them in much the same way that carbon monoxide kills humans. In cases of carbon monoxide poisoning, CO molecules exhaust the carrying capacity of your red blood cells, depriving your body of the oxygen it needs. Likewise, most terrestrial plants soak up the sodium ions and sodium chloride from salt much faster than they can absorb essential nutrients such as potassium, calcium and magnesium. Without those nutrients, they perish. Spread salt on the fields of your enemies and their crops will fail.

More than 97 per cent of the water on Earth is saline. Wouldn’t it be cruel if nature had locked up the vast bulk of the planet’s vital fluids in a form that no plant could drink? Well, as it happens nature is not quite that cruel. Of the 400,000 flowering plant species around the world, 2,600 do drink seawater. They are halophytes, meaning ‘salt-plant’, and they might just be the answer to a question surprisingly few governments have yet asked: namely, how can we put our planet’s practically infinite volumes of saltwater to good use?

It might not be immediately obvious why such a question is worth our time. But consider: between sea-level rise and the increase in droughts and floods, the acreage available for conventional, freshwater agriculture is shrinking rapidly. Freshwater aquifers are becoming increasingly salty: among them, the Ogallala Aquifer, which covers a quarter of the irrigated land in the US. And so one of the world’s most important breadbaskets is under threat. Elsewhere, one-sixth of the world’s population relies on Eurasian rivers that trace back to Himalayan glaciers, which are themselves disappearing because of climate change....MORE
Royal Kew: "Salt Tolerance (eHALOPH)"
US Salinity Laboratory: Research Databases
USDA: Salt-Tolerant Plants
Boston University BU Today: Lessons from Venice

Gold Showing Signs of Buckling After FOMC

December futures currently $1224.50 down $11.40 after touching $1222:
The next real support are the double bottoms from June and December 2013 at ~$1179:

Both the metal and the miners are going lower.
Chartology: Gold Bugs Index Gets a Wedgie (HUI)

"Economists React to the Fed: Dovish Statement, Hawkish Projections"

From Real Time Economics:
The Federal Reserve on Wednesday said it would continue to keep interest rates near zero for a “considerable time” after it wraps up its bond-buying program, which the central bank said it expects to do next month. Two officials – Philadelphia Fed President Charles Plosser and Dallas Fed President Richard Fisher — dissented on the policy statement. And, in the central bank’s economic projections, most Fed officials said they continue to expect the central bank to start raising interest rates sometime this year.
Here are some quotes from economists following the Fed’s statement, projections and Chairwoman Janet Yellen’s press conference.
  • Statement was more dovish than expected — as very little in the text was changed. Both “significant” underutilization of labor resources and “consider time” remained, with no qualifiers added. … No meaningful upgrade was made in describing the economy.  With respect to inflation, there was a downgrade from inflation has “moved somewhat closer” to inflation has “been running below” the Fed’s longer-term objective.  While the text was more dovish than feared, the “dots” were more hawkish. Looking through the shift in how forecasts are reported (from target rate to target range), the median estimate for 2015 was raised from 1.125% to 1.50% — in other words, an additional fed tightening was priced into 2015. –Michelle Girard, RBS Securities
  • The only thing in this report that I see as a problem is that the hawks seem to be holding to their view even as the economy underperforms and their forecasts are being revised lower. This means that the hawks are not getting tired but that some of the doves may be tiring of fighting the fight even though they know they should. This is a dynamic we will have to watch carefully to see if the Fed is likely to make a policy mistake. At this point, I believe this is just a side effect of the recent back up in inflation and as these price pressures subside the doves will come out of hiding. –Steven Ricchiuto, Mizuho Securities

A Major Flaw: "Ethical Trap: Robot Paralyzed by Choice of Who to Save"

You don't want hesitation in your robotrader.
From New Scientist via Communications of the ACM:
Bristol Robotics Laboratory's Alan Winfield and colleagues recently tested an ethical challenge for a robot, programming it to prevent other automatons--representing humans--from falling into a hole.

When researchers used two human proxies, the robot was forced to choose which to save. In some cases, it saved one proxy while letting the other perish, while in others, it saved both. However, in 14 out of 33 trials, the robot spent so much time making its decision that both proxies fell into the hole.

Winfield describes his robot as an "ethical zombie" that has no choice but to behave as it does....MORE
At the same time you want the computer to discriminate between the command "Execute the trade" and the command "Execute the trader".

"Modern Forensics Reveal Gruesome Details Of King Richard III's Death"

As we wait for economists to rouse themselves and react to the FOMC we will divert ourselves with io9:

Modern Forensics Reveal Gruesome Details Of King Richard III's Death
Richard III was the last king of England to die in battle. But as a new forensic analysis of his remains shows, he didn't just die in battle — he had the living tar beat out of him. Here's how this king met his maker on that fateful day in 1485. 
As you may recall, Richard III's remains were discovered in 2012 under a parking lot by archaeologists from the University of Leicester.
According to historical accounts, Richard abandoned his horse during the battle after it became stuck in a mire. He was then brutally attacked and killed while fighting his enemies. But the exact details of his death are largely unknown, at least until now.
A forensic imaging team, working with the Forensic Pathology Unit and the Department of Engineering at the University of Leicester, used whole body CT scans and micro-CT imaging of Richard's preserved bones to analyse trauma to the skeleton, and to figure out which of his wounds were fatal. In addition, the team analysed tool marks on bone to identify the types of medieval weapons used during the attack.

11 Distinct Wounds
It appears that the King sustained no less than 11 distinct wounds at or near the time of his death. Nine of them were to the skull, likely inflicted during the battle. This suggests he had either removed or lost his helmet. The other two wounds were to the postcranial skeleton (i.e., anything below the cranium).
Modern Forensics Reveal Gruesome Details Of King Richard III's Death
"Richard's injuries represent a sustained attack or an attack by several assailants with weapons from the later medieval period," noted study author Sarah Hainsworth in a press release. "The wounds to the skull suggest that he was not wearing a helmet, and the absence of defensive wounds on his arms and hands indicate that he was otherwise still armoured at the time of his death."...MORE

You Can Read about the Fed or You Can Read "Randy Eurasians Surprise Scientists With Ancient Sex Romp"

From Bloomberg:
A sexually prolific group of Northern Eurasians roamed the ancient world, mating with everyone from the ancestors of Native Americans to Eastern Europeans, say Harvard researchers who suggest the findings should expand existing views of how modern man came to be.

The research, released today by the journal Nature, upends existing scientific wisdom that modern Europeans are the result of hunter-gatherers and indigenous farmers who bred exclusively among themselves, according to researchers at Harvard Medical School in Boston and Germany’s University of Tubingen.

The report suggests a third group, Eurasians who swept in from an area now part of northern Russia, spurred demographic changes across two continents, the scientists said. The study compared DNA in two Eurasian skeletons from that ancient period with DNA gathered from past archaeological finds in a range of countries, as well as DNA from 2,300 present-day people....MORE

Guys Can be Such Idiots

From The Verge:
Synthetic female decoys might be the next big thing in male insect zapping 
The next headline in one of the feedreaders is from Abnormal Returns:
Wednesday links: unique life experiences

Meet The 2014 MacArthur Fellows (if you're not one of them we have some helpful hints for next year)

From the Wall Street Journal:
MacArthur 'Genius Grant' Winners Include Cartoonist, Mathematician, Engineer
New Crop of 21 Fellows for 2014 to Receive Awards of $625,000, No Strings Attached
CHICAGO—A mathematician offering his book free on the Internet, an engineer helping organizations redesign home stoves around the world to cut pollution and a cartoonist using graphics to explore family relationships will each get a boost in their pursuit of modern solutions to age-old issues, thanks to the John D. and Catherine T. MacArthur Foundation. 

The three are among this year's 21 recipients of MacArthur fellowships, colloquially known as "genius grants." (See their photos.)
Each $625,000 award, spread out over five years, comes with no strings attached and is intended to offer ambitious people a degree of financial freedom to elevate their work.

"I couldn't imagine a more significant validation of the importance of the work we are doing," said Jonathan Rapping, a 48-year-old winner and founder of Gideon's Promise, a seven-year-old nonprofit that coaches public defenders to more effectively aid poor clients, largely in the South. 

Mr. Rapping, who likened his program to a Teach for America for public defenders, said the extra funding will be a big help and will influence future decisions. His wife gave up her teaching job—and the pension that goes with it—a few years ago to help run the organization with him. 

"Every year we think, 'Is this too big of a risk?' and now we have the financial freedom to do what we need to do," he said.

The MacArthur program, which began in 1981, has given money to about 900 fellows, who are nominated, evaluated and chosen anonymously. This year's winners span in age from 32 to 71 and include nine women and 12 men. A common thread: The winners reach their audiences in surprising places. 

"This year, we have several people who one might describe as being engaged to challenge the rest of us to be lifelong learners outside the traditional classroom," said Cecilia Conrad, who directs the fellows program as a vice president of the foundation. "It's new solutions to old problems."

Tami Bond, a 50-year-old environmental engineer at the University of Illinois at Urbana-Champaign, is measuring emissions around the world and helping organizations come up with new household cooking stoves for use in developing countries that are more efficient and produce less soot. 

Mathematician Jacob Lurie, who was honored for redefining models in algebraic geometry, negotiated with his publisher to make his book on math principles available for free download on his personal website. While academics sometimes place papers online free, putting a whole book online isn't yet standard practice, according to the 36-year-old Harvard University professor. "From my point of view, the benefit of writing a book is for people to look at it. I would like as many people as possible to look at it," he said. 

Alison Bechdel, a 54-year-old cartoonist and graphic memoirist known for a long-running comic strip about a group of lesbian friends, plans to use part of the money to buy a huge scanner to help with her work....MORE
I'll stop right there knowing that you're probably more interested in how you can make the 2015 vintage rather than what this cohort is all about.
First posted in September 2007.
How to become a MacArthur genius.

From Slate (Warning. Spoilers Ahead):
The MacArthur Foundation anointed 24 new geniuses Tuesday. They granted $500,000 fellowships to artists, engineers, and a host of other creative types. The foundation dispenses no-strings-attached awards every year to people who display "creativity, originality, and potential to make important contributions in the future." In 2000, David Plotz told aspiring geniuses the seven rules to live by to win the hearts and minds of the MacArthur Foundation. The article is reprinted below.

When Peter Hayes learned that he had won a $500,000 MacArthur genius grant last month, he was stunned: It's "like being hit by a Mack truck. … It's a little disorienting," he told the San Francisco Chronicle. Hayes shouldn't have been too disoriented. It would have been surprising if he hadn't collected a MacArthur. He helps North Korea develop windmills as an alternative to nuclear power. He takes underprivileged kids sailing in San Francisco Bay during his free time. And he lives in Berkeley, Calif., where you can't buy a latte without meeting a MacArthur-stamped brainiac.

Since 1981, the John D. and Catherine T. MacArthur Foundation has awarded 588 "fellowships" worth nearly $200 million to Americans "who show exceptional merit and promise for continued and enhanced creative work."

(The foundation detests the word "genius" because it "because it connotes a singular characteristic of intellectual prowess.")

The fellowship is a no-strings-attached grant: Each 2000 winner will get $100,000 a year for five years. MacArthur calls the cash a gift of time, because it frees winners from financial constraints on their art, science, or activism. (The $4 billion foundation is the estate of John D. MacArthur, a skinflint who became the second-richest American by selling cut-rate insurance through the mail. His son Rod grabbed control of the trust after John's 1978 death and pushed the genius project.)...MORE

Warning: Spoilers

Rule No. 1: Live in New York or San Francisco.
Rule No. 2: Be a professor.
Rule No. 3: If you don't want to teach college, make art.
Rule No. 4: Do not, under any circumstances, work for the government or the private sector.
Rule No. 5: Upset conventional wisdom.
Rule No. 6: Be left wing.
Rule No. 7: Be slightly, but not dangerously, quirky.
As for those cash payments:
MacArthur Foundation linked to payday lending

Chartology: Gold Bugs Index Gets a Wedgie (HUI)

Most active December futures $1236.70, flat on the day. The index is at 218.94 down 1.36.
Our call on the commodity, for the last 20 months has been: lower, and for the last 15 months we've been targeting ~$875. Should the metal trade there the miners in the HUI would have some serious cash flow problems.
From Kimble Charting Solutions:
The Gold Bugs index remains above support that dates back 10-years. Over the past year and a half, the index has created a pennant pattern, a series of lower highs and high lows, teasing both the bulls and bears.

As you can see, this pattern will be coming to an end soon. Pennant patterns are popular for suggesting that a large move is ahead, yet which direction is a different story. This pattern does fall under the continuation of trend category, anything is possible though!....MORE

"Is this the best academic cover letter ever?"

From Columbia's Chris Blattman:
Dear Sir or Madam, But Most Likely Sir:
I am writing to apply for your advertised position in Social Innovation. As a Comparative Literature Ph.D, I am proficient in the fabrication of closed tautological circles of non-meaning; this makes me the ideal candidate for a job seeking “innovative teachers… for the position of lecturer in innovation.”
Full post

The Deal for Forbes Is Finalized, Bono Is Out and What it Means for the Future of Journalism

Well, not so much Bono as Elevation Partners of which the U2ist is an elevated partner.
From the New York Post:
The Asian investors who are taking over a majority stake in Forbes Media finalized the deal last Friday, officially ending 97 years of family control — but so far the new owners are staying away and leaving their new possession in the hands of current management.

CEO Mike Perlis, who is being retained, told staffers on Monday that he will hold a Town Hall meeting on Oct. 8 after flying to Hong Kong this week to meet the new owners, including Tak Cheung Yam, head of a diversified holding company, Integrated Asset Management, and Wayne Hsieh, co-founder of ASUSTek, a Singapore-based computer vendor....MORE
And a look from the inside, Lewis DVorkin writing at Forbes:
Inside Forbes: The Fast Times and Hard Truths About Building a New Model for Journalism
Right after the sale of FORBES was announced, I got a gracious and astute email from an industry colleague I have followed closely for 10 years. He expressed admiration for our accomplishments — the reinvention of a grand old media brand by way of new models for journalism and advertising. Yet, he saw our story as a “cautionary tale” for newsrooms in search of a “simple solution” to their problems. “I never thought you thought it was simple,” he said. “I think others interpret it that way… or rather, wish they could.”

He’s right. Nothing was or is simple about the media industry’s predicament, or our get-it-done-now effort to transform into a publishing platform for journalists, experts and marketers. Every day, I ponder the professional, career and business complexities of it all, especially when I hear that such-and-such plans to start a contributor model or leap into native advertising (Note: I vote for dropping the descriptor “native,” since advertising clearly labeled is marketing and content properly sourced is content).

Over four years (six counting True/Slant, my startup), I’ve “unapologetically” told journalists the time has come to think differently. With the same openness, I’ve pointed out (in my posts and on panels) challenges and shortcomings that are either specific to us or the news industry. In that spirit, here are 10 things we’re still grappling with as we continue to chart our own course:
1) The Newsroom: We’ve replaced a century of time-worn journalistic thinking and processes with the intuitive digital skills of a new professional. They live and breathe the “life,” but skipped the old-world apprenticeship phrase (Where Have You Gone, Bob Feit?). That puts periodic strains on traditional notions of journalistic excellence. Younger journalists also have different workplace expectations, making it imperative that typically slow-to-promote news organizations offer a clearly visible career path....MORE
Finally, the most amazing stat for a property I figured would go for maybe, high eight figures:
How Forbes Got to a $475 Million Valuation

Investing: "Have the Behaviorists Gone Too Far?"

From the CFA Institute's Enterprising Investor blog:
In 1966, Abraham Maslow published The Psychology of Science: A Reconnaissance. Building on a concept he had touched upon in earlier works, Maslow wrote, “I suppose it is tempting, if the only tool you have is a hammer, to treat everything as if it were a nail.” It was a clever way to discuss confirmation bias, and the phenomenon he described became commonly known as Maslow’s hammer or man-with-a-hammer syndrome.

Of course, Maslow’s quip was not intended for tradesmen working in the physical world. No, instead this remark was referred people working with ideas — psychologists, politicians, teachers, business leaders, and, of course, analysts, portfolio managers, and investors. It is much easier to imagine a person working in a knowledge-based trade applying a framework that he or she believes in only to discover that the world around them is more complex than expected.

Imagine an analyst who believes a particular management team is effective because it has met or exceeded EPS guidance for 16 consecutive quarters. How surprised and disappointed this analyst would then be if the company’s stock crashes when it is revealed they only met or exceeded EPS guidance by ramping up low-quality loans in off-balance sheet vehicles! Of course, this is only one of countless examples in which our perspective, and even our expertise, can fail us. In analysis, it is much easier to shove square pegs through round holes than it is in the physical world.

Behavioral finance practitioners and academics alike agree that human beings are flawed, which, of course, we are. We can and do make poor choices, particularly when faced with uncertainty. Of course, what is more uncertain than the markets? So, investing is rife with examples of irrational behavior. Pioneers in behavioral finance, such as Daniel Kahneman, often present compelling examples of how people make poor choices in situations in which there are demonstrably superior alternatives. From myopic loss aversion, to social proof, to thinking fast, the list goes on and on. I’m a big believer in all of this and have used a variety of behavioral models as an analyst and fund manager.

Nevertheless, I have recently begun to wonder: Have the behaviorists’ claims gone too far?
If you listen to many behaviorists present their case, one might conclude that every decision we humans make is bad. For instance, Kahneman recently said:

“The idea of self-defeating behaviour, of fate working through the actions of individuals to ultimately destroy themselves — that is a major theme. We put an inordinate weight on minor embarrassment relative to significant consequences. I would imagine that many people have died in house fires because they were looking for their trousers.”

How can this be? Are we all so very shortsighted? Aren’t we as individuals capable of learning from our mistakes? How many times must we put our hand on a hot stove? In our everyday experience, we don’t find the haphazard, unpredictable world that many behaviorists would have us believe in. There is order amid the chaos, isn’t there? This is why German psychologist Gerd Gigerenzer released a new book titled Risk Savvy: How to Make Good Decisions in which he tries to debunk much of Kahneman’s work. In his own words, Gigerenzer believes Kahneman takes an unfairly negative view of the human mind.

Applying the behaviorists’ ethos to finance, it seems every investment we make is bad. How is this possible when there are two people on opposing sides of every trade? One person is selling when another is buying. So, isn’t one person wrong and the other one right? Doesn’t it follow that one of the two made a good decision — even if for the wrong reasons?

The world is more complicated, you say? I agree. But different people have different objectives, time horizons, risk tolerance levels, constraints, emotional and psychological profiles, etc. In short, they have different investment policies. An investment policy statement is a document which spells out how a given portfolio is to be managed against a wide range of factors important to the owner of the money. Even if investors don’t codify it in an investment policy statement, every investor has some set of investment policies, however well or poorly defined. Yet, none of the behavioral studies I’ve seen measure an investor’s actual choices relative to that investor’s investment policy. I know this because investment policy statements, where they exist, are not public. They are very personal documents that are held very closely....MORE
Tangentially related:
Book Review: "Cass Sunstein’s Latest Combines Banal Insight with Pernicious Intent"
Not seeing Sunstein as an intellectual heavyweight has actually gotten me banned from some polite company but even with that social ostracism I still think he's just a busybody.
So it was with great delight I read the first line of this review and decided to use it as a headline.
From Spiked:
Cass Sunstein’s Latest Combines Banal Insight with Pernicious Intent
Social scientists sometimes have an irritating habit of devoting a lot of resources and time to the rediscovery of the blindingly obvious. It is in this vein that Cass R Sunstein’s Why Nudge? boasts of the brilliant insights of behavioural economists who have ‘discovered’ that people often take decisions about their life that contradict their individual interests or aims. Throughout Why Nudge?, this unremarkable insight – well known to most mature adults – is presented as an amazing game-changing discovery.

The reader is constantly reminded that ‘behavioural findings’ show that ‘people make a lot of mistakes, some of which can prove extremely damaging’. People are sometimes short-sighted and, apparently, ‘procrastination, inertia, hyperbolic discounting and associated problems of self-control’ create all kinds of adverse outcomes for people. We are also informed that human beings make erroneous choices which ‘fail to promote their own ends’. Sunstein appears to revel in highlighting the different manifestations of the ‘human propensity to err’. He characterises what were formerly perceived as human weaknesses and poor choices as behavioural market failures. The purpose of this term is to draw an analogy with the economic concept of market failure.....MORE

Tuesday, September 16, 2014

Equities: "Helicopter Jon to the Rescue as S&P 500 Gains Most in Four Weeks"

From Barron's Stocks to Watch column:
It’s a bird! It’s a plane! It’s Jon Hilsenrath, doing his best Superman impersonation to lift the stock market on his back before the Fed announcement tomorrow.

The S&P 500 rose 0.8% to 1,998.98, its biggest gain in four weeks, while the Dow Jones Industrial Average gained 0.6% to 17,131.97. The Nasdaq Composite advanced 0.7% to 4,552.76 and the small-company Russell 2000 finished up 0.4% at 1,150.97.
Sure, there was economic data today–producer prices didn’t budge in August, a sign that inflation might not be a worry after all–but the market did little today until a video of the Wall Street Journal’s Jon Hilsenrath, who is often thought to be a mouthpiece for the Fed, hit the web. The resulting bounce caused the Lindsey Group’s Peter Boockvar to dub today’s move”Jon Hilsenrath” rally:
This is a Jon Hilsenrath stock market rally. In a webcast done on, Jon Hilsenrath (just a reporter but one who speaks to many Fed officials) is making the argument that since the economic data hasn’t changed much since the July meeting, the Fed will likely keep “significant underutilization” of labor market resources comment in the statement. On the “considerable time” wording, he thinks it stays in the statement but will be qualified as the Fed doesn’t want to send any signals on WHEN rates may go up. As I said this morning, a potential “considerable time” change in the wording is just semantics and focus more on whether “significant utilization” stays in or not.
Birinyi’s Rob Leiphart considers the possible changes and what their impact could be....MORE

A Quick Note on An Omission In the CalPERS Hedge Fund Announcement

Following up on "CalPERS Says Via Con Dios to Hedge Funds".
Do note the lack of a 10-year return value in the press release.
From CalPERS:

CalPERS Eliminates Hedge Fund Program in Effort to Reduce Complexity and Costs in Investment Portfolio

Decision not based on performance of program

SACRAMENTO, CA – The California Public Employees’ Retirement System (CalPERS) today announced that it will eliminate its hedge fund program, known internally as the Absolute Return Strategies (ARS) program, as part of an ongoing effort to reduce complexity and costs in its investment program.
The staff recommendation, supported by the Investment Committee, will exit 24 hedge funds and six hedge fund-of-funds valued at approximately $4 billion.

“We are always examining the portfolio to ensure that we are efficiently and cost-effectively achieving our risk-adjusted return goals,” said Ted Eliopoulos, CalPERS Interim Chief Investment Officer. “Hedge funds are certainly a viable strategy for some, but at the end of the day, when judged against their complexity, cost, and the lack of ability to scale at CalPERS’ size, the ARS program is no longer warranted.”

Following the 2008 global financial crisis, CalPERS began examining ways to ensure it was less susceptible to future large drawdowns. The System restructured its investment operations, improved its internal oversight and control functions, and refocused some of its investment programs. In February 2014, the CalPERS Board adopted a new asset allocation mix that reduces risk to the portfolio, while still being able to achieve its return goal of 7.5 percent. CalPERS earned 18.4 percent during the 2013-14 Fiscal Year and has averaged a 12.5 percent return for the past five years and an 8.4 percent return for the past 20 years....
The 5-year value catches pretty much the whole recovery in the equity market July 1, 2009-June 30 2014.
The June 30 FY is fortuitous.

The 20 year return number encompasses the downturn but also has the dot.bomb run-up.

The 10-year return number is a bit trickier to handle because, at 7.2%,  it is below the 7.5% return assumption the fund's financial soundness requires.
So they omit it.
-Source: CalPERS Facts at a Glance, September 2014, page 5.

And no, the fund did not actually say "Go with God" when they bid the hedgies goodbye.

Internet of Things: In Which Izabella Approaches Escape Velocity Edition

This is pretty good.
From FT Alphaville:

Cybersecurity dispatches: Managing the IoT poltergeist threat
Imagine the scene in the not too distant future.

An Uber self-driving electric car has just dropped you home. Your front door has recognised your face, and your fingerprint has authenticated that it’s definitely you. You get into your house, not a key in sight, kick off your shoes, and happily discover that the 3D printing feature in your fridge has already printed the food you plan to consume for dinner. All the appliances you need are on. And everything you don’t need is off, nice and efficiently saving power.

You decide to treat yourself to a quick 30-minute Netflix holographic update, only to get a nudge from your wearable tech that you’ve still got a 10 minute exercise deficit to meet your daily exercise quota. It’s a problem because you happen to have signed up to the extreme health management option which shuts down ApplePay access — without which Netflix won’t work — if you fail to meet your objectives. You quickly get busy on your smart-grid connected treadmill (which conveniently sells off the energy produced by your system back into the grid).

When all of a sudden… your utility door flings open and your iRobot Roomba begins singing Daisy, Daisy....MORE

But do you know why your Roomba is singing Daisy?
It's an homage to the first singing computer:
From Switched, November 2009:
...Rejoice! World Learns Why HAL Sang 'Daisy'

Morgan Stanley: Worst Beta-adjusted Period for Small-cap Stocks Since the Late 1990s

I know what you're thinking but don't. These kinds of trends take a while to play out and there's no need to be early. If you miss the first few points of a turn, so what?
From SafeHaven:

Patiently Waiting for Mean Reversion
So far this year, small-cap growth stocks have surprisingly been lackluster. After 2013, when it gained a scorching 38.8 percent, the Russell 2000 has delivered a tepid 0.62 percent year-to-date (YTD).
Russell 2000 Index's 2013 Total Return Compared to 2014 YTD
Performance has been so poor, in fact, that the spread, or bifurcation, between the 12-month return residuals of small and large caps is at its widest since the dotcom bubble of the late 1990s and early 2000s. This bifurcation is one of the largest since 1975.

According to Morgan Stanley, we're in the worst beta-adjusted period for small-cap stocks since the late 1990s. The 12-month return in August for small-caps was -9.7 percent, placing it in the bottom 6 percent of any 12-month period since the mid-1970s.
Small-Cap Bifurcation
The bifurcation is more than apparent when you compare the year-to-date (YTD) total returns of the big boys (those in the S&P 500 Index and Dow Jones Industrial Average) to their little brothers (those in the Russell 2000 and S&P SmallCap 600 Index). The Russell, though it led the other indices in March, has failed to reach a new record high, which the S&P 500 and Dow managed to achieve in the last couple of months....MUCH MORE

CalPERS Says Via Con Dios to Hedge Funds

It appears the pension behemoth did indeed "CalPERS Making Big Cuts to Hedge Fund Allocations".
For the last six or seven years we've chronicled* CalPERS' Adventures in Alt-land, often with barely disguised glee.
Here's the latest from FT Alphaville:
The message is starting to get through. Calpers, the largest US public pension fund, has said that it will stop investing in hedge funds.

It took a while. The $300bn California Public Employees’ Retirement System rejigged its portfolio of hedge funds at least three times since it became one of the first pension funds to embrace the fee structure in 2002. The previous decision had been to halve exposure, rather than elimininate it entirely.

Still, public pension fund trustees now have a very visible example to follow. If the largest and best resourced US pension system found the cost and complexity of investing in hedge funds too much to make it worth while, why should they think they can do better?

Here is the explanation for the decision to exit 24 hedge funds and 6 fund of funds, investments worth $4bn.
“We are always examining the portfolio to ensure that we are efficiently and cost-effectively achieving our risk-adjusted return goals,” said Ted Eliopoulos, CalPERS Interim Chief Investment Officer. “Hedge funds are certainly a viable strategy for some, but at the end of the day, when judged against their complexity, cost, and the lack of ability to scale at CalPERS’ size, the ARS program is no longer warranted.”
Cost is very much part of the calculation. When in 2013 we spoke to the late Joe Dear, then chief investment officer for Calpers, he told us that the pension fund paid about $1.2bn a year in fees to third party investment managers. Of that, $1bn went to “alternatives”, private equity and hedge funds, even though the assets represented less than 15 per cent of the portfolio. That disparity was the starting point for the decision Calpers has now come to.

Complexity deserves a bit of unpacking because, returning to John Lanchester’s theme of how finance reverses the meaning of words, it has been one of the supposed selling points for hedge funds — they can use complex trading strategies that slow moving investors couldn’t hope to do themselves....MORE
*There are so many posts that use of the search blog box is required. Here's one from 2009:
CalPERS appears to be a willing victim
Following up on "Calpers Sues Over Ratings of Securities":
...The security packages were so opaque that only the hedge funds that put them together — Sigma S.I.V. and Cheyne Capital Management in London, and Stanfield Capital Partners in New York — and the ratings agencies knew what the packages contained. Information about the securities in these packages was considered proprietary and not provided to the investors who bought them....MORE
Got that? We have a FIDUCIARY saying they bought stuff they didn't understand.
And weren't allowed to see.

"Hey Mister, I've got a magic box that will turn your dollar bills into C-notes!"
I'm pretty sure a smart young paralegal could draft the brief against CalPERS in about fifteen minutes....
Pension Funds Drive Growth Of Alternative Assets. And: CalPERS Up 68% on Commodities; Down 31% on Real Estate. Action, Baby, Action!

"Crisis Chronicles: The British Export Bubble of 1810 and Pegged versus Floating Exchange Rates"

From the Federal Reserve Bank of New York's Liberty Street Economics blog:
In the early 1800s, Napoleon’s plan to defeat Britain was to destroy its ability to trade. The plan, however, was initially foiled. After Britain helped the Portuguese government flee Napoleon in 1807, the Portuguese returned the favor by opening Brazil to British exports—a move that caused trade to boom. In addition, Britain was able to circumvent Napoleon’s continental blockade by means of a North Sea route through the Baltics, which provided continental Europe with a conduit for commodities from the Americas. But when Britain’s trade via the North Sea was interrupted in 1810, the boom ended in crisis. In this edition of Crisis Chronicles, we explore the British Export Bubble of 1810 and ask whether pegged or floating exchange rates are better for an economy.

The Credit of the Kingdom
As we noted in a previous post on the collapse of the French assignat, England had been at war with France since 1793. While public expenditures to finance the war mounted, revenue remained stagnant and, as the budget deficit widened, the pound began to depreciate. In 1797, the landing of a French frigate in a Welsh harbor caused a minor run on the Bank of England, and bullion reserves fell so low that by May of that year, the British government passed the Bank Restriction Act to exempt the Bank of England from having to convert banknotes into specie. The act was intended to “support the public and commercial credit of the kingdom” and was to be temporary—until June—but banknotes remained inconvertible for nearly twenty-five years.

     Reflecting on the French experiment with the assignat, Lord Lansdowne, one of the most influential Whig politicians of his time, prophesied, “the fall will be slow perhaps, and gradual for a time, but it will be certain.” And as we saw with the assignat, gold disappeared from circulation and silver was scarce. The Bank of England even resorted to stamping the King’s head on Spanish dollars to maintain a circulating medium, and received permission to print lower-denomination £5 notes (the law forbade issuing lower-denomination notes).
Before the suspension of convertibility, the quantity of gold on hand constrained the Bank of England’s issuance of banknotes. But after the suspension, the Bank of England remained prudent in its issuance of banknotes and the public accepted the conversion from specie to paper without disturbance or confusion. The Bank of Ireland followed the Bank of England’s lead, as did other country banks that issued notes. And public expenditure remained relatively in check through about 1810.

British Trade with the Americas
As Spain’s influence in the Americas waned, Britain was able to do more business there, importing raw materials and exporting British manufactured goods. Then, in 1807, Napoleon demanded that Portugal join the trade boycott against the British and declare war on England. When Portugal hesitated, Napoleon's ally, Spain, allowed French troops to pass through to Portugal, where the French captured Lisbon as Portugal's royal family fled to Brazil. In exchange for Britain’s help in enabling the royal family to escape, the Portuguese granted Britain trade privileges with Brazil. Low-cost British goods found a new market that had previously been dominated by local artisans. Trade with the Americas not only rescued Britain from Napoleon's continental boycott, but also helped the country achieve record exports from 1808 to 1810.

“Intercourse with the Continent”
Over time, however, the record exports led to speculation, and when trade between Holland and Britain was briefly interrupted as France’s attempts to blockade the North Sea ports intensified, access to the continental market was cut off and prices of colonial goods fell in England, even though they remained costly on the continent. The economic boom ended with a severe crisis in July and August 1810 as Britain experienced a number of commercial failures and merchant bankruptcies. The crisis spread to West Indian merchants, who then dragged down the bankers who had extended credit to them. As trade declined, West Indian docks remained stuffed with goods awaiting export. But by the summer of 1811, the crisis subsided. ...MORE

Market Anomalies: Can You Combine Value and Momentum?

From Optimal Momentum:
Value and Momentum Revisited
Most academic research on momentum deals with individual stocks. Most applications of momentum are also oriented toward individual stocks. The three largest publically offered momentum programs (AQR momentum mutual funds, PowerShares DWA Momentum ETFs, and iShares MSCI USA Momentum Factor ETF) all use individual stock momentum. The only widely-available public program using momentum applied to asset classes was the ALPS Goldman Sachs Momentum Builder that recently went out of business due to lack of interest.

Yet momentum applied to individual stocks is not the ideal way to use momentum. Transaction costs due to high turnover of stock portfolios can negate much of the benefit of momentum investing. Momentum applied to broad-based indexes or sectors, on the other hand, can capture high momentum profits with much lower transaction costs.

Here is a table from my new book Dual Momentum Investing: An Innovative Approach to Higher Returns with Less Risk. (The book can be pre-ordered now from Amazon.) This table shows the performance of the AQR Momentum Index composed of the top one-third of the 1000 highest capitalization U.S. stocks based on 12-month relative strength momentum with a one-month lag. AQR weights their index positions based on market capitalization and adjusts the positions quarterly. For comparison, we show the performance of applying absolute momentum to the Russell 1000 index by moving into aggregate bonds whenever 12-month absolute momentum is negative.

Table 9.2 AQR Momentum, Russell 1000, and Absolute Momentum 1980-2013
AQR Momentum Index[1]
Russell 1000 Index
Russell 1000 w/Abs Momentum
Annual Return
Annual Std Dev
Annual Sharpe
Max Drawdown
These figures do not account for the .7% per year in additional transaction costs for the AQR Momentum Index, would have put it at a disadvantage to even the Russell 1000 index on a risk-adjusted basis. 

The next table shows the AQR Momentum Index, the Russell 1000 Value Index, and a 50/50 combination of value and momentum, which was advocated in the Asness et al. (2013) paper "Value and Momentum Everywhere." This combination is supposed to be desirable due to the negative correlation between value and momentum. We see that value combined with momentum does give a slightly higher Sharpe ratio than either value or momentum alone. However, there is little or no advantage with respect to maximum drawdown, and the results still pale in comparison to simple absolute momentum used with the Russell 1000 Index....MORE
HT: Abnormal Returns

See also:
Whoa! Has The Small-Cap Premium Disappeared? That Would Leave Only Momentum in the Tried-and-True Anomaly File!