Thursday, October 5, 2017

"Tesla leases two big Fremont office buildings where 1,000 could work" (TSLA)

From the Mercury News:

Exclusive
PUBLISHED: | UPDATED:
FREMONT — In a big expansion that could bring several hundred workers into Fremont, Tesla has leased two large office buildings in an area perched near the access roads for the Dumbarton Bridge.
The maker of electric vehicles has leased offices at 6800 Dumbarton Circle and 6900 Dumbarton Circle in Fremont, according to public documents filed with the Alameda County Recorder’s Office. The buildings are owned by development firm Peery Arrillaga.

The county records show that Tesla is the tenant in two buildings that together total roughly 230,000 square feet.

The building at 6800 Dumbarton Circle totals about 116,000 square feet, according to brochures posted on one of the Peery Arrillaga property websites. The 6900 Dumbarton Circle office building totals 114,000 square feet, the Peery Arrillaga website shows. The county documents also were posted on the entry doors of each of the buildings.

Palo Alto-based Tesla builds electric vehicles at a large auto factory in Fremont, and the buildings the company has leased are located between Tesla’s Peninsula headquarters and the company’s East Bay vehicle factory.

Based on typical zoning and planning regulations, potentially 1,000 or more people could work in the two buildings combined. The 116,000-square-foot building could accommodate 580 workers and the 113,000-square-foot building could house 570 employees...MUCH MORE

"Beach, please... Billionaire VC finally opens way to waves"

From The Register:
Vinod Khosla responds to the only thing he knows: money

Billionaire venture capitalist Vinod Khosla has finally backed down in his efforts to stop Californians from accessing a beach via a road on lands he owns.

The Sun cofounder has been in a protracted legal battle over the beach since 2009, and despite losing time and time again, he has stubbornly refused to open a gate blocking an access road to the shore. In the end, California got him where it hurts: his wallet.

Under a law passed in 2014 – introduced solely because of Khosla's behavior – the California Coastal Commission can fine someone up to $11,250 a day if they block public access to a beach. That amounts to a hefty $4.1m a year.

And last week, having spent years wrangling with Khosla, the commission informed him that it was considering imposing those fees. The watchdog outlined a number of violations and threatened penalties of up to $20m with the threat of a lien being placed on the property if he didn't pay.

The price of keeping St Martins Beach to himself suddenly increased from $1m a year in legal fees to close to the $32.5m he paid for the 90-acre lot back in 2008. Khosla was also likely to lose an upcoming court case, which he would then have to appeal to the US Supreme Court, which doesn't come cheap.

The massive fines are still not a bankruptcy-inducing event from someone worth $1.75bn but were certainly enough to get the 62-year-old's attention.

The end?
Or maybe not...MORE

"Google’s Search for the Sweet Spot"

From Stratechery:

...Apple’s Sweet Spot

Steve Jobs’, in his last keynote, framed that slide as a new direction for Apple after the company’s brilliant digital hub strategy, introduced ten years prior:
In fact, though, Apple was building Digital Hub 2.0, with the iPhone at the center:
Sure, iCloud kept files in sync (usually), but the iPhone was the juggernaut it was because it hit the perfect sweet spot of company, market, and value chain:

Company: Apple from the very beginning has been premised on the idea of integrating hardware and software, and the iPhone was the ultimate expression of that premise.

Market: The smartphone market was the best market technology has ever seen: not only did everyone need a phone, but in developed countries carriers subsidized top-end models because they drove higher average revenue per subscriber. Moreover, because a phone was something you took with you everywhere, there was far more value placed on non-technical attributes like fit-and-finish and brand.

Value Chain: Apple’s integration delivered sustainable differentiation in the smartphone value chain, forcing every other element, from suppliers to network providers to app makers to modularize themselves around Apple’s integration.
The result was the most successful product ever.

Google Search’s Sweet Spot
Given that Google is the second most valuable company in the world (after Apple), it is quite clear the company has found a sweet spot of its own. Indeed, Google Search ticks the same boxes as the iPhone:

Company: Google is built around the idea that superior technology is all that matters; that was certainly the case with search, which brilliantly leveraged the connectivity inherent to the web to make itself better; unlike its competitors, the bigger the web became, the better Google itself became.

Market: The truth is that the best technology does not always win; what made Google search the dominant force that it was and remains was the openness of the web. The less friction there was in the traversal of information the more that sheer technological prowess matters.

Value Chain: Google is the king of aggregators because, when information shifted from scarcity to abundance, discovery became the point of leverage, and Google was better at discovery than anyone. That allowed the company to integrate end users and discovery, making search the single best place to advertise for all kinds of industries.

Building truly transformative products requires all three: a company that is the best at serving a market at the point in the value chain where integration can drive sustainable profits.

Google’s Differentiator
Last year, after the company’s first ‘Made By Google’ event, I framed the company’s hardware efforts in the context of the search business model. Specifically:
A business, though, is about more than technology, and Google has two significant shortcomings when it comes to assistants in particular. First, as I explained after this year’s Google I/O, the company has a go-to-market gap: assistants are only useful if they are available, which in the case of hundreds of millions of iOS users means downloading and using a separate app (or building the sort of experience that, like Facebook, users will willingly spend extensive amounts of time in).

Secondly, though, Google has a business-model problem: the “I’m Feeling Lucky Button” guaranteed that the search in question would not make Google any money. After all, if a user doesn’t have to choose from search results, said user also doesn’t have the opportunity to click an ad, thus choosing the winner of the competition Google created between its advertisers for user attention. Google Assistant has the exact same problem: where do the ads go? ...
...MUCH MORE

"People buying meat from strangers on social media is a serious problem"

Ya think?

From The Next Web:
Ireland’s authorities are investigating illicit sales of meat on social media. Yes, meat. Like sausages and steak. On Facebook.

According to the Irish Times, a recent investigation by the Food Safety Authority of Ireland (FSAI) centered around the sale of meat on social media by unregistered individuals.

Obviously, this is bad. Any business that sells food in Europe (and, indeed, in pretty much any Western country) is subject to stringent health, safety, and hygiene regulations.

If you’re buying food – meat of all things – from someone on Facebook, you have no idea if the person is abiding by these rules.

There’s no way to tell that they washed their hands after using the restroom before handling your cut-price sirloin. You don’t know if their premises have been inspected, or if they’re working in a clean and proper environment.

And there’s no guarantee what you’re paying for is the real thing. Food fraud is endemic in Europe, the most notorious example being the 2013 horsemeat scandal, where donkey and horsemeat entered the foodchain masquerading as beef.....MORE

Hackers Working for the Russian Government Have Stolen Data On How U.S. Intelligence Defends Against Cyberattacks

Sometimes I wonder if U.S. intelligence agencies are as good as they say they are.
Via ZeroHedge:

Putin Strikes Again: Russian Hackers Reportedly Stole NSA Data On Cyber Defense
Looks like Russian President Vladimir Putin is back at it.

The Wall Street Journal reported Thursday that hackers working for the Russian government have stolen data describing how US intelligence agencies infiltrate foreign computer networks and how they defend against cyberattacks. The data were stolen after a National Security Agency contractor removed the highly classified material and put it on his home computer, according to WSJ’s anonymous sources.

News of the hack, which hasn’t been exposed previously, explains the federal government’s abrupt crackdown on Moscow-based security firms Kaspersky Labs. As WSJ explains, the contractor may have been targeted after hackers identified the files thanks to the contractor’s use of a popular antivirus software created by Kaspersky.

According to WSJ, the hack is considered by experts to be one of the most significant security breaches in recent years. It offers a rare glimpse into how the intelligence community thinks Russian intelligence exploits the widely available software products. It appears to be one of the most harmful infiltrations of government servers since hackers purportedly sponsored by the Chinese military stole records about US intelligence assets from the Office of Personnel Management’s servers.

The incident occurred in 2015 but wasn’t discovered until spring of last year, said the people familiar with the matter. If the report is accurate, the breach would be the first known incident of Kaspersky software being exploited by Russian hackers for the purposes of espionage. The company, which sells its antivirus products in the US, had revenue of more than half a billion dollars in Western Europe and the Americas in 2016, according to International Data Corp. By Kaspersky’s own account it has more than 400 million users world-wide, though it’s about to lose all of its customers from the US government.

The NSA wouldn’t confirm, or deny, the story....
....MORE

Reinsurance Market and Insurance-Linked Securities (ILS) Looking at Losses

From Artemis:

Negative returns the order of the day for 2017: Lane Financial
The insurance-linked securities (ILS) and reinsurance market are set to be characterised by losses in 2017, with specialist consultancy Lane Financial LLC saying that “negative returns will be the order of the day in 2017,” but that the impact to the market will be muted by excess capacity.

Lane Financial takes a look at the impacts of recent hurricanes and earthquakes on the catastrophe bond market in its latest quarterly report and discusses the broader impacts to reinsurance and ILS investments.

Whatever the negative returns though, the reinsurance and ILS sector is well positioned to deal with the expected $100 billion plus of losses that are set to be paid, meaning that the impacts to how the market functions will be constrained by its ability to absorb them.

Lane Financial note that; “The loss will not be so consequential as it would if the industry were capital restrained.”

The consultancy said that they do expect to see similar reactions in the reinsurance industry as were witnessed post Katrina, with the potential for new start-ups, company failures and also increased premium availability.

However they explain that this time around, largely due to the excess capacity in the space (also perhaps the greater influence of ILS, we’d also suggest), the consequences for the market will be “much more muted.”

Lane Financial estimates a catastrophe loss of -5.4% for the quarter, using secondary cat bond mark data, with September down -6.51% but this was offset by small gains in July and August, the firm explained....MUCH MORE

Was 2017 The Last Good Harvest? "Ag commodities 'seem to be in early days of a bull market'"

Probably not the last....
HOWEVER, there are some early indications that the regime that has produced the almost-thirty-year run of favorable crop conditions—a run not seen for some 800 years—is coming to a close. These indicators are tentative and are NOT immediately actionable but should the good times end, fortunes will be made.

In this piece  Agrimoney looks at a couple factors slightly different  from those we're hinting at but which should push things in the same direction.

Symbol Last Chg
Corn 350-2+2-0
Soybeans 962-4+4-2
Wheat 443-2+1-2

From Agrimoney, October 3:

Farm commodities appear to be "in the early deals of a bull market", according to the operator of the Bcom index, proving particularly upbeat over prospects for corn, soybean and wheat prices.
Bloomberg Intelligence acknowledged that the depression in the Bcom agriculture index, as measured on a spot basis, was reaching "historic extremes" in terms of its weak performance.
"Since 1991, the 52-week rate of change in the Bloomberg agriculture spot index has never been lower for longer in a four-year period," the business said, highlighting the weight on prices in particular from a cool US August which, in boosting US row crop yields, undermined values.
However, the extent of the downturn represented a contrarian buy signal, Bloomberg Intelligence (BI), said, saying that "agriculture prices are about as buried as they get" and that "price gains are likely for agricultural commodities" in the newly-started October-to-December quarter.
The comments come amid some recovery in hedge fund sentiment towards the sector, with managed money returning to a net long in major ag contracts last week, although many commentators remain cautious over prospects for price gains given large world supplies of many crops.
 'Early days of a bull market'
BI's forecast reflected in part an assessment of demand exceeding supply in many crops, with commentators such as the International Grains Council, for instance, seeing a drop in world grain stocks this year, albeit to still-high levels.
In the July-to-September period, "primary demand and supply drivers", as measured by Bloomberg Intelligence, "held above par [for] the first quarter in six years".
However, the index operator highlighted in particular the deep nature of the so-called contango in futures – in which prices of distant contracts exceed those for spot lots, "indicating little incentive to sell", and indeed rewarding producers for storing crop instead.
The steepness of the contango in ags is the steepest since August 2006, after which the Bcom ag index rallied 140% to a peak in 2008.
"Futures curves signal agriculture prices are establishing a bottom," Bloomberg Intelligence senior analyst Mike McGlone said, adding that "agriculture appears to be in the early days of a bull market"....MORE

Real M0 Money Supply’s Trend Is Positive For First Time Since 2016

From The Capital Spectator:
The Federal Reserve’s narrowest gauge of money supply (measured in real or inflation-adjusted terms) posted a fractional gain in August vs. the year-earlier level – the first positive year-over-year reading since February 2016. The return of annual growth for the monetary base suggests that the central bank may be laying the groundwork to slow or even reverse its recent efforts to tighten policy.

Recall that real M0’s annual trend offered an early sign in 2015 that the Fed was moving toward hiking interest rates for the first time in nearly a decade. Later that year, in December, the central bank announced that it was raising the target range for the federal funds rate. The central bank has increased rates several times since then.
In the nearly two years since that first hike, real M0’s annual trend has been mostly negative, with a downside bias that reached a trough in Oct. 2016 via a 13.4% year-over-year decline — a 68-year low. Over the subsequent months, the annual decline’s depth has been easing, ticking above zero in August for the first time in 19 months. Is that a sign that the Fed’s recent program of tightening monetary policy is downshifting or perhaps in the early stages of reversing? It’s too soon to know for sure, but M0 data deserves close attention in the months ahead.

Meantime, what might convince the Fed to rethink its recent bias for tightening policy? Relatively muted inflation is probably a factor. In fact, the latest numbers through August show that the core measure of the personal consumption expenditures index – the Fed’s preferred inflation gauge – continued to decelerate. The annual change in core-PCE eased to 1.3% through August, the softest pace since Nov. 2015. The sliding trend serves as a reminder that the Fed’s 2% inflation target has become increasingly elusive this year....
...MORE

Wednesday, October 4, 2017

Hurricane Watch: Tropical Depression 16 Has the Potential To Develop

The TD gets two shots at picking up some heat energy, first that hot spot off Belize and Yucatán and then in the Gulf when it passes over the loop current.

From the  University of Miami Rosenstiel School of Marine and Atmospheric Science:

Depression 16
Tubes: Best Track data, Dots: Forecast Track data
NESDIS GeoPolar Blended SST
NAVO-ALPS Altimetry: Jason-2, SARAL, Cryosat-2, Jason-3

HT to and discussion of Ocean Heat Content: Wunderblog.

What Google Says It Is Using Artificial Intelligence For: An Interview With the CEO (GOOG)

From The Verge, Oct. 4:

Sundar Pichai says the future of Google is AI. But can he fix the algorithm?
‘We feel huge responsibility’ to get information right
Unbeknownst to me, at the very moment on Monday morning when I was asking Google CEO Sundar Pichai about the biggest ethical concern for AI today, Google's algorithms were promoting misinformation about the Las Vegas shooting

I was asking in the context of the aftermath of the 2016 election and the misinformation that companies like Facebook, Twitter, and Google were found to have spread. Pichai, I found out later, had a rough idea that something was going wrong with one of his algorithms as we were speaking. So his answer, I think it's fair to say, also serves as a response to the widespread criticisms the company faced in the days after the shooting.

"I view it as a big responsibility to get it right," he says. "I think we'll be able to do these things better over time. But I think the answer to your question, the short answer and the only answer, is we feel huge responsibility." Later, he added, "Today, we overwhelmingly get it right. But I think every single time we stumble. I feel the pain, and I think we should be held accountable."

Learning about Google's "stumble" after we talked put some of our conversation in a different light. I was there to talk about how Pichai’s project to realign the entire company to an "AI-first" footing was going in the lead-up to Google's massive hardware event. Google often seems like the leader in weaving AI into its products; that’s certainly Pichai’s relentless focus. But it’s worth questioning whether Google’s systems are making the right decisions, even as they make some decisions much easier.

When the subject isn't the failure of its news algorithms, Pichai is enthusiastic about AI. There’s not much difference between an enthusiastic Sundar Pichai and a quiet, thoughtful Sundar Pichai, but you get a sense of it when he names a half-dozen Google products that have been improved by its deep learning systems off the top of his head.

Google's lead in doing clever, innovative things with AI is impressive, and the examples Pichai cites can sometimes even verge on inspiring — but there's clearly still work to do.

Most executives talk about AI like it's just another thing that's included in the box or in its cloud; it's a buzzword, a tick box on a spec sheet slotted in right after the processor. But Pichai is intent on pressing Google's advantage in AI — not just by integrating AI features into every product it makes, but by making products that are themselves inspired by AI, products that wouldn't be conceivable without it.

There's no better example of that than Google Clips, a tiny little camera that automatically captures seven-second moving photos of things it finds "interesting." It's a new way to think about photography, one that leverages Google's ability to do lots of different AI tasks: recognize faces, recognize "bad" photos, recognize "interesting" content. It's simply applied to your own pictures instead of content on the internet.

Clips does all this locally: nothing is sent to the cloud, and nothing integrates with whatever Google Photos knows about you. As much as Google is known for doing its AI in the cloud, many of the devices it's releasing are doing AI locally. Pichai says that's by design, and that both kinds of AI are necessary. "A hybrid approach absolutely makes sense," he says. "We will thoughtfully invest in both. Depending on the context, depending on what you're dealing with, it'll make sense to deploy it differently."

Clips is the kind of thing Pichai wants Google to do more of. "I made a deliberate decision to name the hardware product with [a] software name," he says. "The reason we named it Clips is that the more exciting part of it is … the machine learning, the computer vision work we do underneath the scenes." 

For Google, making hardware is about selling products, but it's also about learning how hardware can better integrate AI. "It's really tough to drive the future of computing forward if you're not able to think about these things together," Pichai says. Fundamentally, his question about every hardware product is "how do we apply AI to rethink our products?" He doesn't want to make AI just another feature, he wants AI to fundamentally alter what each device is.

Some of those half-dozen AI examples Pichai cites are solutions to problems you might not realize could be solved with AI. Recently, Google Maps added the ability to find parking near your destination. What you might not know is that Google isn't just canvasing local parking garages; it's using AI. 

"It's fascinating," Pichai says. The Maps team applied AI to see whether Google Maps users were finding parking easily when they arrived at their destinations. "They have to distinguish between people who have just shown up in a Lyft and gotten out, versus actually driving the car and getting parking quickly."

We've gotten used to lots of online services quietly getting better thanks to AI, but Pichai wants to drive that even more aggressively into the devices we're using. In short, he wants to have AI change the user interface of our phones.

"The product can learn and adapt over time," Pichai says. "You see very little of that today. My favorite [example] is I open Google Fit [every day] to a certain view, and I navigate to a different view." One wonders why he doesn't just wander over to the Google Fit team and ask them to change it. Instead, apparently, he would like AI to realize what you're doing with your phone "300 times a year" and make it simpler....MUCH MORE
Meanwhile, in Australia, a Machine Learning treasure trove:
Australia approves national database of everyone's mugshots

Tuesday, October 3, 2017

Whitney Tilson on Shorting Tesla (and other stuff) TSLA

We have a few hundred posts on Tesla, going back to before the IPO including some thoughts* on shorting TSLA.
A few links after the jump.

TSLA Tesla, Inc. daily Stock Chart
$336.09 down $5.44 last.

From ValueWalk
From Whitney Tilsons latest email
1) Michelle Celarier with an in-depth look at Tesla: Elon Musk vs. the Haters, http://www.institutionalinvestor.com/article/3756165/investors-pensions/elon-musk-versus-the-haters.html. It was my worst short ever in 2013-14 (from $35 to $205; thank goodness I was long Netflix, which rose a similar amount during the same time frame). Ever since I covered, I’ve been warning all of my short selling friends that it’s a bad short at any price. To be clear, forced to go long or short Tesla here, I’d go short, but we investors aren’t forced to make any investments. Here are my quotes in the article:
Tesla checks all the red flags short sellers look for, but, he shrugs, so what? “I can do the numbers and see how much the company is losing, but you’re short an incredibly maniacally driven CEO, with manically driven engineers assaulting the world’s largest industry. If they succeed, Tesla could be a $400 billion market cap company.”

Tilson has continued to follow the Tesla saga, but has resisted the urge to short it again. “Tesla is a good case study in how the world’s smartest short sellers can get sucked into something that’s just a bad short.”

…“I’d rather short something that’s a scam,” says Tilson. He applauds Tesla’s environmental mission and doesn’t want it to fail. “I don’t want to bet against that in an emotional sense.”

…As Tilson puts it, “I don’t want to be short open-ended situations. The tail risk is just too high.”
2) Good to see my fellow hedgies doing well (though we’re still trailing the market by quite a margin):...MUCH MORE
* April 1, 2013 
Why We Don't Short Tesla: The stock is up 16% On The Day (TSLA)

April 22, 2013 
Tesla Motors Trades At All-Time High (TSLA)
The stock is at $49.75, up 4%, after trading as high as $50.19.
The thing to remember with all-time highs is there is no overhead supply, no shareholders thinking "As soon as I get to breakeven I'm getting out"....
August 2015
Short Selling and The Information Embedded In The Cost To Borrow Stock (TSLA)

August 2016
...For the longest time we had a Don't Short Tesla policy because it showed signs of being a cult stock and cult stocks can kill shorts. Plus it can be very hard to locate stock and very expensive to borrow when you do,
From an August 2015 post:

Morgan Stanley Gives a $465 Target For Tesla, Stock Jumps 5%...
We've publicly shorted Tesla twice on the blog, both times worked out because nothing like this happened during the holding period.
For the most part this April 2013 headline is operative "Why We Don't Short Tesla: The stock is up 16% On The Day (TSLA)". That was at $44.00, up $6.11.
Recently $255.30 up $12.15.
Morgan Stanley was one of the firms that sold the recent half-billion stock offering....
However, after the SolarCity deal and Elon's purchase of SCTY debt (on top of his SpaceX buying SCTY debt) I'm more open to betting against the company, at least tactically if not to zero.
Remember, your mileage may vary, close cover before striking etc.

June 2017
"Einhorn Compares GM to Apple and Explains Why He’s Short Tesla" (TSLA; GM)
...It is just so dangerous to put valuation (as compared to fraud) shorts on in a bull market.
We have had a general rule, "Don't short Tesla" virtually since the IPO, that we've violated on three occasions, fortunately profitable but it is tough to tell if it was worth the risk.
Finally, don't be this guy (no, seriously, don't be this guy):

"Does Finance Benefit Society?"

From LF Economics, October 2:
The title of the article comes from a very interesting and hard-hitting paper authored by a leading mainstream economist, Luigi Zingales. He is a professor of entrepreneurship and finance at Chicago University’s School of Business, with impeccable mainstream credentials. The paper in question appeared in The Journal of Finance and can be found here.

The main argument made by Zingales is that while economies need banking and finance facilities, this sector has clearly become too large for the good of societies, with particular focus on the US. The out-of-control financial sector siphons off an ever-increasing proportion of economies’ surplus, levies odious fees and interest charges, engages in unceasing control fraud (though that term is not explicitly used), generates asset bubbles, rent-seeks, and buys off both politicians and the economics profession.
The financial sector has become bloated relative to the size of the economy:


A competitive, efficient and honest financial sector can only exist with public support. In contrast, Australia’s financial sector is the opposite, with the media revealing control frauds on a regular basis and a majority of the public in favour of a Royal Commission to investigate its many crimes. It has become a loathsome, criminal leviathan whose greed knows no bounds.

That the financial sector has made rent-seeking and the purchase of politicians into a fine art should come as no surprise.
...MORE

The David Says Eat More Packaged Food (and short the stocks)

Note: that's The David, not some guy named Dave:


He's lonely and wants more people to look like him.

The big guy was last seen in "If You Want To Be Happy, Listen Up. Now! alternative title: The FT's Izabella Kaminska Is..." wherein Ms. K interviewed Robert Lustig, a pediatric endocrinologist at UCSF on neurotransmitters and the difference between happiness and pleasure and metabolic pathways and all kinds of stuff. And that's the hook for this quick post.

Going back to the introduction to March 7's M&A In European Food:
I'm not sure that consumer packaged goods is the area to be in, at least not in the U.S. and not based on names like Kellogg or General Mills.
For a quarter-century those manufacturers ratcheted prices as though they were tobacco companies but people find it easier to give up their Cheerios than their cigarettes.

The managements milked that approach for pretty much all it was worth so, as operating entities, they aren't all that attractive but someone will decide the only thing left to do is to asset strip or dividend recap the life out of the former cash cows.

Top o'the market to ya...
In May 25's "Nine of the World's Biggest Packaged Food Companies Have Launched Venture Capital Units" we looked at the charts for the two stocks mentioned in the March introduction:
...And on to the charts of the two companies mentioned in that March 7 post:
GIS General Mills, Inc. daily Stock Chart


K Kellogg Company daily Stock Chart

If interested see also 2012's "Illusion of Choice: Consolidation in the Packaged Food Industry":
From Chart Porn:
This has been making the rounds lately. I find it as interesting to look at the minimalist design inherent in modern logos as the ownership concentrations.

image

(click to enlarge)
.
You'll note our two examples top right. For a more in-depth look at the brands these companies own, Inverse published "Snack Choice Is an Illusion, Ten Brands Control Everything" on September 29 which took a 2017 look at the 2012 graphic:

Look on my brands ye Mighty, and despair!
Per the paradox of choice, the more options you’re presented with, the less happy you’ll be once you finally choose one. So if you’re paralyzed by indecision about which corporation to support with your snack dollars, fear not, because there are nowhere near as many options as you’d think. 

In 2014, Oxfam mapped out the properties of 10 different corporations, from Coca-Cola to Kellogg’s, to demonstrate just how insular the realm of processed food can be. The resulting infographic is sometimes shocking. For instance, it is faintly distressing but wholly fascinating to know that the same corporation, MondelÄ“z International, produces Dentyne and Velveeta.

To know that 10 companies control most of the world’s bottled water, cheese snacks, frozen food, and cereal options is to experience a uniquely modern sense of existential dread. How can a consumer hope to make their money talk when spending is more equivalent to a scream into the void? Well, thankfully Nestle makes Hot Pockets.

If you’re feeling masochistic, here’s a quick breakdown of who owns what.

Coca-Cola 
https://fsmedia.imgix.net/3a/9e/3e/19/0035/41d5/844b/cda0e5f69dd3/hey-im-an-aquarius.jpeg?auto=format%2Ccompress&w=667
The Coca-Cola breakdown doesn’t hold a ton of surprises. They stay in their lane and only produce other drinks, unlike those freaks over at PepsiCo. A little disappointing to see Odwalla under here but otherwise no earth-shattering information.
Mars

https://fsmedia.imgix.net/2e/93/9a/51/92bb/4f1f/9c89/41817797ec65/mars-makes-mars-oh-my-god.jpeg?auto=format%2Ccompress&w=700
Hmmmm, Uncle Ben’s. Sure, all of these food items aren’t made with the same equipment or anything, but this is still a little bit suspect. Mars also has a very strong showing in the gum department. Good to know you’re not cheating on Doublemint when you chew Orbit.
...MUCH MORE 

Monday, October 2, 2017

"Hurricane Maria a $30bn re/insurance loss: Karen Clark & Company"

From Artemis, Sept. 29:
Catastrophe risk modelling specialists Karen Clark & Company (KCC) have put the insurance and reinsurance industry loss from hurricane Maria’s Caribbean and Puerto Rico impacts at $30 billion, which falls at the top-end of RMS’ estimate, but below the low-end of AIR’s.

The addition of this third estimate of insured losses caused by hurricane Maria helps, as we begin to find a point to focus on in the broad range from the low-end of RMS’s estimate of $15 billion to the top-end of AIR’s at $85 billion.

Coincidentally, the majority of equity analysts we track had been working off an assumption of $30 billion to $40 billion of losses from Maria in their calculations, so KCC’s $30 billion estimate provides additional evidence that the eventual industry loss will be around this point.

KCC’s estimate is based on modelled output and puts Puerto Rico as the lions share of the industry loss from hurricane Maria, at $28.35 billion. The U.S. Virgin Islands add $789m, Dominica is put at $445m, Guadeloupe $119m and other Caribbean territories will contribute another $94m to the industry loss, according to KCC.

The total estimate is for $29.797 billion of losses to fall to insurance and reinsurance interests....MORE

Norwegian Government to Chip In $17 Million to Develop the First Electric Autonomous Cargo Ship

From the Yara press release:

Yara Birkeland design revealed and test model demonstrated for the first time
Sep 29, 2017

  • Final design of Yara Birkeland, first zero emission autonomous container vessel, revealed
  • Successful seawater testing of Yara Birkeland model
  • Norwegian government (ENOVA) backs building of Yara Birkeland, covers about 1/3 of cost
  • Private-public collaboration (Yara, Kongsberg, Marin Teknikk, SINTEF, ENOVA)
Yara Birkeland revolutionizes seaborne transport, replaces 40,000 diesel truck journey a year
Trondheim (Norway) 29 September 2017: A six-meter long model of the final design of the autonomous and zero emission container vessel "Yara Birkeland" was launched in SINTEF Ocean's 80 meter long sea laboratory in Trondheim, Norway this week.

In May, Yara announced the partnership with technology company Kongsberg to build the world's first electric container ship. Its design, developed by Marin Teknikk, has now been revealed.

"With this new autonomous battery-driven container vessel we move transport from road to sea and thereby reduce noise and dust emissions, improve the safety of local roads, and reduce emissions," says President and CEO of Yara, Svein Tore Holsether. "It was a special moment in Trondheim when, together with our partners -- Kongsberg, Marin Teknikk , SINTEF and ENOVA -- we witness the design and demonstration of a miniature Yara Birkeland for the first time."

Yara Birkeland is a global milestone for seaborne transportation
The cutting edge, six meter long and 2.4 tonnes heavy model with technology destined for the real ship, including a fully working thruster system designed by Kongsberg, will now undergo comprehensive testing at SINTEF's test tanks before construction of the full-scale vessel starts. The ship yard will be selected by the end of 2017.

"Initial tests of the model were successful, proving both concept and the technology," says Geir Håøy, President and CEO of Kongsberg. "The testing at SINTEF Ocean marks an important milestone in the development. This vessel is important for the entire maritime industry, and Yara deserves praise for their initiative and commitment. Yara Birkeland is the start of a major contribution to fulfilling national and international environmental impact goals, and will be a global milestone for seaborne transportation."

Norwegian governments supports building of Yara Birkeland
The Norwegian government enterprise ENOVA has granted NOK 133.6 million to Yara towards the construction of the world's first electric and autonomous container ship. This will cover about one third of the estimated cost....
...MORE

Previously:
Shipping: He May Not Have Received His Nobel Prizes But The World's First Fully Electric Autonomous Container Ship Will Be Called the Birkeland

"Norway Takes Lead in Race to Build Autonomous Cargo Ships"

Here's the model being tested: 


ICOs seek refuge in renowned tax havens: From Gibraltar to Isle of Man

From SafeHaven:
If there is something that the British love more than rainy days and vinegar on their fries, it’s tax havens. And now, these tax havens are racing to create supportive regulations for initial coin offerings (ICOs).

As ICOs receive harsh criticism from the media and increased scrutiny from governments, there is no doubt that these offerings may be the most controversial form of funding ever. Due in part to the incredible amount of money being generated.

Former Mozilla CEO Brenden Eich chose a new path of fundraising when launching his free, open sourced, safety-focused web browser, Brave. Instead of borrowing money or selling equity to investors, Eich chose to create an ICO.

Within 30 seconds of launching his ICO, the Ethereum-based Basic Attention Token (BAT) generated $35-million worth of ETH between only 130 investors. One buyer even dropped a whopping 20,000 ETH ($4.7-million) on the ICO.

Most of the time, it works out for very well investors, too. Because many ICOs start with a low valuation, there have been a number of success stories seeing coins go from a fraction of a cent to several dollars within weeks.

In 2017 alone, ICOs have raised over $2.3 billion for new startups. Nearly 4 times as much money for startups as traditional venture capital endeavors for tech companies. And that’s during a time when VCs are booming.

Because there is so much money being thrown around, however, it has also drawn the attention of some more nefarious acts.

With ICOs still in a sort of gray area, there have been instances of pump and dump schemes, laxed security which has left investors’ funds vulnerable, and startups promising ideas which are either undeliverable or add little to no potential for a return on investments. For these reasons, governments have been scrambling to take action.

While larger governments such as China and the United States have taken a more cut and dry approach, smaller governments are looking towards more supportive regulations.

Gibraltar
Gibraltar is a British Overseas Territory located on the coast of Spain. The territory’s economy is dominated by financial services, due primarily to its 10% fixed corporate tax rate. The low tax rate and UN status make The Rock a favorite among small businesses.

As early as 2016, Gibraltar took an agreeable stance on cryptocurrencies, even hosting a bitcoin exchange-traded instrument (ETI) traded on the Gibraltar Stock Exchange (GSE).

While the territory has been working on supportive regulations since 2016, in May 2017, The Rock released a comprehensive draft on the proposed framework which has since drawn crypto-
heavyweights Xapo and Coinsilium. And in September, the Gibraltar Financial Services Commission announced the GSE’s plans to integrate blockchain technology into the trading and settlement processes of its stock exchange in partnership with Cyberhub Fintech, a Sydney-based cybersecurity firm.

In a statement, the GSE noted:
The investment signals the Gibraltar Stock Exchange’s continued commitment to expand its capital markets network and influence in Asia as well as its ambition to become one of the world’s first regulated exchanges to fully integrate use of blockchain into its operational processes from ICO to IPO....
...MORE

"Swiss regulator probes ICOs following fake coin scandal"

We last checked in on Swiss cryptocoins a few weeks ago in "News From Switzerland's Crypto Valley: "Crypto piggybank foundations proliferate in Zug""

From Swissinfo, Sept. 29:

Ten days after shutting down a fake cryptocurrency scam, the Swiss financial regulator said it is investigating the procedures for setting up new companies in the rapidly expanding sector.

The Swiss Financial Market Supervisory Authority (Finma) issued guidanceexternal link on Friday after noting “a marked increase in initial coin offerings (ICOs)” in Switzerland. ICOs are a form of crowdfunding that allow blockchain start-ups to accumulate capital to develop their nascent technology.

Switzerland, and in particular canton Zug, has become a global hotbed for ICO activity in recent months. Financial services firm PwC found that Switzerland hosts four of the largest ten ICOsexternal link to date, which is more than the United States or China.

Around a quarter of the $2.1 billion (CHF2 billion) raised by ICOs this year is believed to sit in the vaults of Swiss-based foundations.
http://www.swissinfo.ch/blob/43559236/93fe6e5a007915395c12339dfb0ad041/pwc--jpg-data.jpg
But the largely unregulated sector has started to attract negative headlines of late. China and South Korea have both slapped bans on further ICOs while the US Securities and Exchange Commission (SEC) has ruled that all tokens issued by ICOs are securities – placing them under strict stock market rules.
The ICO boom has also raised questions in the Swiss parliament by politicians who are concerned that the phenomenon could damage Switzerland’s reputation.

Money laundering rules
Last week, Finma launched bankruptcy proceedings against three companies that had been selling the fake cryptocurrency E-Coin to the public. The regulator said at the time that it was also investigating 11 other suspicious cases.

“Finma cannot rule out that ICO activities may be fraudulent, especially in light of current market developments,” it said in its latest statement on Friday....MORE

Sunday, October 1, 2017

Meanwhile, In Vietnam: 51 Bankers Found Guilty, Sentences From Life In Prison to Death

A threefer:
First up, the BBC:

Vietnam fraud trial: Death penalty for ex-head of OceanBank
The former head of a major Vietnamese bank has been sentenced to death for his role in a fraud case involving millions of dollars of illegal loans.

Nguyen Xuan Son, who served as general director of OceanBank, was convicted of embezzlement, abuse of power and economic mismanagement.

Dozens of former employees also received lengthy prison sentences in the major corruption trial.
Nguyen Xuan Son's lawyer told Reuters he would appeal the verdict.

OceanBank is partially-state owned, so Son's crime of mishandling state money was thought to be particularly serious. After leaving the bank, he rose to be head of state oil giant PetroVietnam.
Vietnam is one of the world's biggest executioners, according to Amnesty International, but this is believed to be the first time in years that the death penalty has been given to such a high-flying former official.

Earlier in the day, the bank's ex-chairman Ha Van Tham, once one of the richest people in Vietnam, was jailed for life on the same charges, and for violating lending rules....MORE
From Jurist Paper Chase:

Vietnam fraud trial: 51 ex-bankers found guilty
[JURIST] A Vietnamese Court began issuing verdicts [Vietnam Net report] and sentences Friday in an ongoing anti-corruption case for members of Ocean Bank, with former CEO Nguyen Xuan Son being sentenced to death for embezzlement.

Other sentences include life in prison for Ha Van Tham, former Chairman of Ocean bank. The 51 officials and bankers who stood trial were accused of mismanagement leading to losses [BBC report] of USD $69 million. The charges implicated dozens of the men down the ranks, targeting accountants and branch managers....MORE
That Vietnam Net story includes a picture of Ha Van Tham, he looks very sad.

NYT “How to Survive the Apocalypse” Forbes: "How To Doomsday Prep Like An Economist"

The Times piece has some good advice: a hoard of mini-bottles of booze used for either barter or the more traditional apéritif/digestif role can make the apocalypse more tolerable. Ditto for cigarettes.

Personally I think of the Wiemar inflation which highlighted the store-of-value character that the humble bar of soap possesses, especially for folks who don't directly own various means-of-production. And one of the lessons of Houston is how prized toilet paper and/or paper toweling can get.
As always we discourage gold as money, if you are going with shiny stuff, junk silver coins make more sense, both for recognition and divisibility.

After the jump we have a few other handy hints that may not be readily apparent but should probably be in your bag of tricks.

From Forbes' Modeled Behavior, September 30:

How To Doomsday Prep Like An Economist
The New York Times had a story recently about growing popularity of preppers, or the “swelling class of weekend paranoiacs of affluent means who are starting to mull fantasies of urban escape following the endless headlines about disasters”, as they put it. Let me be clear up front: I’m not a prepper. I don’t think social and economic collapse is imminent. But for the preppers and would-be preppers out there I thought it might be useful to consider how an economist would doomsday prep.

Let’s get right to the gold. People really like to imagine that owning gold, silver, and other precious metals is a hedge against an economic and social calamity. For some reason, goldbuggery and doomsday prepping are two flavors that go great together. The argument is that precious metals have been used for currency in earlier societies, and so when paper currencies become worthless as governments crumble, we’ll revert back to using precious metals. That's the argument, but part of the appeal is surely that it’s just fun to own gold and precious metals. It makes you feel like an explorer, pirate, king, or some other literary figure. Here’s the thing though: consider the income effects.

Income effects are the change in the demand for a good due to changes in income. Gold is very valuable in the current world we live in, which is filled with lots of high income people who like to buy gold for jewelry and ornamentation. According to the World Gold Council, 47% of the above ground stock of gold in the world is used for jewelry. A disaster bad enough to make developed nation currencies completely worthless is also going to absolutely obliterate the demand for gold because gold is a luxury and incomes will plummet.

And that’s just the demand side. As governments around the world collapse, the effective supply of gold is going to skyrocket as banks and reserves are raided. The US government alone has 9,000 tons of gold, and the 40 biggest central banks combined have 31,000 tons. That’s about 16% of all the gold mined in human history, and would be a cube of gold almost 40 feet in each direction. As the warlords of post doomsday world raid these reserves, that's a lot of gold that's going to get into people's hands.

I would predict that the price of gold as measured in many other goods and services will crater, making that pile of gold you stocked up worth a whole lot less than it is worth now.
So if not gold, what should you invest in to prepare? I would suggest a couple things.
First is human capital. Having skills that are useful and marketable in the post doomsday world will be important....MORE
In 2015 we linked to a Barron's Penta story in "How the Superrich Hedge Their Bets" with the introduction:
This is very serious stuff.
There are two questions you should be able to answer in the affirmative to establish a base from which to develop:
1) Do I have a talent or skill that I can market should the worst happen?
2) Do I have friends in countries outside my own domicile.
Link after the jump...
That in turn linked back to an  April 2011 post on one of the best investment books of all time

"How Travel can be an Education for Investors and Could Possibly End Up Saving Your Life and Fortunes"
...If there is an effective hedge against calamity, it is a combination of geographic diversification, retention of capital in mobile form and the keeping in personal touch with active businesses, both at home and in other centers.

One must keep personally alert, active and in the swim. Retired businessmen, in my opinion haven't much chance. One must not tie up all one's assets in one's home town or in a form that is not liquid and subject to easy shifts. There are far too many people who have a small business in their home city, their own house in the same city, and if they own any securities, some shares perhaps of the local utility company.

In addition their friends and connections are all in a radius of 10 to 15 miles.
My real thought is that one's greatest assets are his mental competence to do something useful and his connections.
Therefore establish some emergency connections away from home. Establish a fund or funds away from home as well, both as a "calamity hoard" and as an aid to keeping your foreign interests alive....
...One ought to be able to move to several parts of this country and the world, and have enough friends to be happy and get a helping hand to start, and have ready at hand enough funds for a grubstake to start.
Ask yourself how many widely separated  places you could go to and make a successful new start in life....
Excerpted from Chapter 29, "Travel as an Education for Investors" of Gerald M. Loeb's The Battle For Investment Survival, Simon & Schuster, 1935.

See also:
Happy 75th Anniversary to one of the few MUST READ Investing Books: Gerald M. Loeb's "The Battle for Investment Survival" Chapters 1-3

This Is An Amazing Chart: "The Financialization of America... and Its Discontents"

I don't have close-to-hand the figures that lead up to the 1971 peak so can't tell you to what extent endpoint bias shapes the narrative. However...that is one persistent trend over the 44 years from the peak to the 2015 cutoff.
From Charles Hugh Smith via the Daily Reckoning:
Labor’s share of the national income is in freefall as a direct result of the optimization of financialization.

The Achilles Heel of our socio-economic system is the secular stagnation of earned income, i.e. wages and salaries. Stagnating wages undermine every aspect of our economy: consumption, credit, taxation and perhaps most importantly, the unspoken social contract that the benefits of productivity and increasing wealth will be distributed widely, if not fairly.

This chart shows that labor’s declining share of the national income is not a recent problem, but a 45-year trend: despite occasional counter-trend blips, labor (earnings from labor/ employment) has seen its share of the economy plummet regardless of the political or economic environment.
https://dailyreckoning.com/wp-content/uploads/2017/09/DR092917_down.png
Given the gravity of the consequences of this trend, mainstream economists have been struggling to explain it, as a means of eventually reversing it.

The explanations include automation, globalization/offshoring, the high cost of housing, a decline of corporate competition (i.e. the dominance of cartels and quasi-monopolies), a failure of our educational complex to keep pace, stagnating gains in productivity, and so on.

Each of these dynamics may well exacerbate the trend, but they all dodge the dominant driver of wage stagnation and rise income-wealth inequality: our economy is optimized for financialization, not labor/earned income.

What does our economy is optimized for financialization mean?

It means that capital and profits flow to the scarcities created by asymmetric access to information, leverage and cheap credit — the engines of financialization.

Financialization funnels the economy’s rewards to those with access to opaque financial processes and information flows, cheap central bank credit and private banking leverage.

Together, these enable financiers and corporations to get the borrowed capital needed to acquire and consolidate the productive assets of the economy, and commoditize those productive assets, i.e. turn them into financial instruments that can be bought and sold on the global marketplace...MORE.
HT: ZeroHedge

"How This Playboy Centerfold Model Became the “First Lady of the Internet”"

We looked at this story via a different source (MIT) back in 2012 but with his death it feels almost obligatory to have a post on Hefner or Chicago or Playboy or some combination of the three.
“Playboy could not have happened anywhere else but Chicago.”  
— Hugh Hefner in the Chicago Tribune, April 21, 2012
From Chicago Magazine:

Lena Soderberg’s centerfold shoot in November 1972 (the magazine’s best-selling issue ever) became the Lena test image, coded into the DNA of the web
Once upon a time Playboy was ubiquitous in a way that seems unimaginable now. In The New Yorker, Joan Acocella reports that “by the end of the sixties, one-fourth of all American college men were buying his magazine every month.” The plausible reasons for its decline are numerous. Print circulation has declined generally; maintaining a magazine that presents itself as the apex of a certain kind of culture, over more than six decades, is an impossible task.

The world changed around it; the internet subsumed it. Digital media, in each new form, took away pieces of the modish, urbane image Hugh Hefner centered Playboy around. But at its height—literally when its most successful issue published in the early 1970s—a Playboy centerfold shoot became the digital template for the technology that would make its main product, nude women, almost unavoidable, rather than hidden between the pages of a magazine stored in closets and under beds.

“In the nineteen-eighties and thereafter, the artificiality only increased, as did that of all American mass media,” writes Acocella of the aesthetic evolution of his centerfolds. As his models became more airbrushed and digitized ,Hefner adapted to the wider trends of 1990s and 2000s by embracing new media like DVDs and streaming video. In 2005, Playboy ventured into reality television, further bolstering the brand while further undermining the idyll Hefner had based it upon. “Hefner leased expensive cars for his girlfriends to keep up appearances, but he refused to buy them cars outright in case it gave them too much independence. He did, however, pay for their plastic surgery,” writes Sophie Gilbert in her Atlantic obituary of Hefner. Later revelations about life with and around Hefner made clear his form of sexual liberation turned into another form of control.

Just a couple years ago, in a desperate attempt to stem its decline, Playboy even gave up on what had made it a publishing titan, nude photos, finally ceding sex to the internet. “That battle has been fought and won,” then-CEO Scott Flanders told the New York Times. “You’re now one click away from every sex act imaginable for free. And so it’s just passé at this juncture.”

Its circulation is still a substantial 673,000, but at its peak it was immense, and its peak was specifically the November 1972 issue, which sold almost 7,200,000 copies. It was everywhere, and one of the places it ended up was a computer lab at the University of Southern California, where computer scientists would put it to work in a technology that would be part of the magazine’s downfall: the digitization of images, and how to transmit them.

The lab was the Signal Image and Processing Institute, then just two years old, and one of the problems its researchers were trying to solve was the then-primitive science of digitally scanning, encoding, and transmitting images. Images, then and now, can require an enormous amount of data to store, and considerable resources to transmit. Veterans of the web will recall when browsers had the option to turn off image-loading; every day I use Adobe Photoshop’s “Save for Web” feature to get a high-quality image at minimum size. That requires complex math: How much information can you lose before an image starts to look bad?

Today SIPI maintains a database of standard test images that researchers use in image processing, and one of them is the Lena (or Lenna) image. It’s a safe-for-work-cropped headshot of a Playboy model named Lena Soderberg, née Sjööblom, a Swede who was living in Chicago when she posed for the November 1972 issue (Playboy called her ”Lenna,” to reflect the correct pronunciation of her name). The researchers took her picture from the magazine in the lab and ran it through a Muirhead wirephoto scanner—which probably looked something like this—a tool used by photographers to transmit photos over phone lines. The famous photo of a young girl, Kim Phúc, fleeing a napalm attack during the Vietnam War in 1972, was transmitted with a Muirhead machine.
Why Lena? First, the photo was there; there were more than seven million copies floating around. “They had tired of their stock of usual test images, dull stuff dating back to television standards work in the early 1960s. They wanted something glossy to ensure good output dynamic range, and they wanted a human face,” writes Jamie Hutchinson in the IEEE Professional Communication Society Newsletter. Humans are good at looking at pictures of humans; we’re attuned to the details of faces, so people looking at compressed versions of her image would be able to notice the fine details of what worked, and what didn’t....MORE
Also at Chicago Mag:

RIP Hugh Hefner: From a Hyde Park Card Table to a Media Empire
The man who famously parlayed $8,000 into the Playboy empire died today at 91. We look back at what he meant to Chicago, and what Chicago meant to him.
A little more than eight years ago, when we were casting about at Chicago for a feature story to accompany a “sex and love” package, I suggested a piece on Playboy’s halcyon days in the city where it all began....MORE

Marx and Engels Meet The Jetsons

A few of our Marx and Engels posts (there are many):
Karl Marx Dabbles in the Market (and rationalizes his success)
Karl Marx on Market Manias
And:
Friedrich Engels: Global Macro With an Emphasis on Commodities

Here's more, from The Baffler:

Of Flying Cars and the Declining Rate of Profit
A secret question hovers over us, a sense of disappointment, a broken promise we were given as children about what our adult world was supposed to be like. I am referring not to the standard false promises that children are always given (about how the world is fair, or how those who work hard shall be rewarded), but to a particular generational promise—given to those who were children in the fifties, sixties, seventies, or eighties—one that was never quite articulated as a promise but rather as a set of assumptions about what our adult world would be like. And since it was never quite promised, now that it has failed to come true, we’re left confused: indignant, but at the same time, embarrassed at our own indignation, ashamed we were ever so silly to believe our elders to begin with.

Where, in short, are the flying cars? Where are the force fields, tractor beams, teleportation pods, antigravity sleds, tricorders, immortality drugs, colonies on Mars, and all the other technological wonders any child growing up in the mid-to-late twentieth century assumed would exist by now? Even those inventions that seemed ready to emerge—like cloning or cryogenics—ended up betraying their lofty promises. What happened to them?...MUCH MORE
"...In the earliest formulations, which largely came out of the Marxist tradition, a lot of this technological background was acknowledged. Fredric Jameson’s “Postmodernism, or the Cultural Logic of Late Capitalism” proposed the term “postmodernism” to refer to the cultural logic appropriate to a new, technological phase of capitalism, one that had been heralded by Marxist economist Ernest Mandel as early as 1972. Mandel had argued that humanity stood at the verge of a “third technological revolution,” as profound as the Agricultural or Industrial Revolution, in which computers, robots, new energy sources, and new information technologies would replace industrial labor—the “end of work” as it soon came to be called—reducing us all to designers and computer technicians coming up with crazy visions that cybernetic factories would produce...."
HT: The Columbia Journalism Review's The Audit blog.
Also:

Marx on Politics

"Politics is the art of looking for trouble, finding it everywhere, diagnosing it incorrectly, and applying the wrong remedies."
-Groucho (source)

San Francisco Fed on Extracting Market Expectations Information From Yield Curve Options

An oldie but goodie, first posted November 9, 2013:
From the Federal Reserve Bank of San Francisco:
FRBSF Economic Letter

Implied Rate Correlations and Policy Expectations

Certain financial instruments provide information on expectations of future interest rate movements. One relatively new instrument is yield curve options, which allow investors to take financial positions on a range of possible future interest rates. These options can shed light on the views of financial markets regarding future monetary policy at a time when short-term interest rates are near zero.

The term structure of interest rates—rates at the full range of maturities—is vitally important to investors, policymakers, and market observers. Financial market focus on the term structure, also known as the yield curve, is particularly intense now since it reflects the trajectory of economic recovery and prospects of a shift in Federal Reserve monetary policy to a less stimulative stance. One place to look for market views on these issues is interest-rate derivatives markets, where traders put money at risk by taking positions in instruments linked to interest-rate movements.

This Economic Letter describes implied correlations among interest rates, a set of indicators of market uncertainty about and exposure to the future slope of the yield curve based on interest-rate derivatives. Each rate correlation expresses the collective views of market participants on the future spread between two points on the term structure. As a market-based estimate of uncertainty about the future slope of the yield curve, implied rate correlations can shed light on what policy moves market participants expect the Fed to make.

Implied rate correlations are derived from the prices of swaptions and yield curve options. Swaptions lock in the right to pay or receive a stipulated fixed interest rate, known as the strike rate, in a swap when the option expires. Curve options pay off if the spread between two interest rates with different maturities is above or below a stipulated strike level on expiration. Combining the information in the prices of these types of options offers an implied view on whether short- and long-term rates will tend to move together.

Implied rate correlations are a relatively new instance of a well-established category of policy indicators: estimates of market expectations of future asset prices based on derivatives. Other examples include using forward interest rates to estimate future interest rates, and estimates of the probability distributions of future interest rates based on interest-rate option prices (see Jackwerth 1999).

Curve options and implied rate correlation
A curve option is a cap or floor on the spread between two constant maturity swap rates with different terms. Its payoff is determined by the difference between the option strike and the swap rate spread at the curve option’s expiration. An example is the 10-year minus 2-year curve option expiring in one year, or “1-year 2s-10s.” If such an option is struck at 250 basis points, that is 2.50 percentage points, it pays the owner 0.0001 times the notional underlying amount multiplied by the amount by which the spread between 2- and 10-year swap rates exceeded 250 basis points in one year, provided that number is positive. If the constant maturity swap spread were 275 basis points in one year and the notional amount were $1,000,000, the option writer would pay $2,500.

Curve options were first traded in the early 2000s. Participants included retail, corporate, and other investors selling yield curve volatility, and hedgers such as insurance companies. In the years preceding the financial crisis, hedge funds and others expressing views on the yield curve entered the market. Dealers are mainly large banks. They describe liquidity as good, in that prices are consistent across dealers, for options up to one year and for standard curve spreads such as the 10-year minus 2-year. 

Figure 1
Implied correlation and yield curve option value
Implied correlation and yield curve option value
Curve option prices express implied rate correlations, that is, market estimates of uncertainty about the future term spread. For example, the price of the 1-year 2s-10s option expresses the views of market participants on how the 2s-10s swap-rate spread will change over the next year. These implied rate correlations can be thought of as extending to the shape of the yield curve the notion of interest-rate implied volatility, which is the market estimate of the magnitude of rate fluctuations over an option’s life.

The interest-rate derivatives used to compute implied rate correlations are standard at-the-money swaptions on two points on the yield curve and a curve option on their spread with the same expiration. For example, a 1-year estimate of the implied rate correlation between the 2- and 10-year rates is computed from 1-year swaptions on the 2- and 10-year rates, and a 1-year 2s-10s curve option. As seen in Figure 1, for given swaption prices, a more expensive curve option corresponds to a lower implied rate correlation.

The implied rate correlation expresses how market participants expect the term structure to change. A correlation close to one means the market considers it likely that any changes in interest rates will be parallel, that is, the two rates in a term spread will change roughly equally. A low correlation indicates the market expects rates at different points on the term structure to change by different amounts....MORE
HT: The Big Picture 

"The Natural Evolution of Artificial Intelligence"

From Barron's Tech Trader, Sept. 24:
As everyday items get “smart,” the technology around artificial intelligence gets more real. The rising stars in this drama include Xilinx, Synopsys, and Cadence Design.

One thing that often fuels technological innovation is the ton of money that gets thrown around.

Case in point: Japanese conglomerate SoftBank Group’s purchase last year of ARM Holdings, a British computer-chip company, for $32 billion in cash. That deal, which came at an astounding premium of 43% above ARM’s value at the time, has no doubt fueled the animal spirits of tech to dream up more companies that can be taken out.

Masayoshi Son, the 60-year-old chairman of SoftBank (ticker: 9984.Japan) who delights in stirring up a commotion, joked at the time that he spends like crazy because he “still feels young.” This past February, Son said, in no way jokingly, that the real reason he’s in such a hurry to spend is that 2018 is the year artificial intelligence surpasses human intelligence, and he wants to control the technology when the machines take over.

Whether from youthful exuberance, or fears of mortality, Son and others like him will most likely continue to fund anything that smells of artificial intelligence, the tech topic du jour. The market is already seeing waves of AI companies, and the chip industry is at the epicenter.

Nearly two years ago, Barron’s wrote that the rise of cloud computing—and with it, aspects of artificial intelligence such as “machine learning”—would spark a wholesale shift in the nature of computer chips (see “Watch Out Intel, Here Comes Facebook,” Oct. 31, 2015).

SOME THINGS WE PREDICTED have played out. Mobileye, a company we featured, got bought by Intel (INTC) this year for $13.7 billion. Two other chip makers we pointed to as potential winners, Nvidia (NVDA) and Advanced Micro Devices (AMD), have seen their shares soar since the article, while shares of incumbent chip giant Intel have lagged, as we predicted.

The market has come to appreciate that Nvidia’s sales of so-called graphics processing chips, or GPUs, are central to the expansion of AI computing by Alphabet’s (GOOGL) Google, Amazon.com (AMZN), and many other giants.

Advanced Micro Devices took on new relevance last week with the rumor that it may be selling chips to Tesla (TSLA) to help with autonomous-car functions. Tesla is already a customer of Nvidia’s. Whether true or not, the speculation stirred some positive words on Wall Street about AMD’s AI potential.

One topic we didn’t pay as much attention to, but that’s starting to get some AI-shine, concerns programmable chips sold by Xilinx (XLNX). Xilinx competes with Intel, which two years ago bought Xilinx’s main competitor, Altera, for $16.7 billion. The third name sometimes lumped in with Xilinx and Altera is Lattice Semiconductor (LSCC), whose sale to a Chinese investment firm was blocked last week by the administration of Donald Trump on grounds of national security.

Xilinx’s parts, called “field-programmable gate arrays,” or FPGAs, aren’t yet synonymous with AI like those of Nvidia. But it has been selling more and more parts to Amazon for its Amazon Web Services. When chips start getting used in cloud computing, it’s predictable they soon get the imprimatur of AI as a side effect.

Xilinx shares have trailed the market this year, rising just 14.8% compared to the 19.4% rise in the Nasdaq Composite Index. That’s despite the fact that its profile as a cloud supplier has grown, and despite its being an oft-mentioned acquisition target. Its shares trade at 25 times next year’s projected earnings per share. That is reasonable for an earnings growth rate of just 10.5%, and cheap compared to the multiple of almost 37 times ARM Holdings got from SoftBank.

Other companies that could get swept up in the fervor include Synopsys (SNPS), a company we profiled in that 2015 story, and Cadence Design Systems (CDNS). The two make software used to design chips. In a world of chips customized for artificial-intelligence tasks, it makes sense that the tools to make those chips will play an important role.

Synopsys founder and CEO Aart de Geus, one of the industry’s deep thinkers, told Barron’s that the next big thing that will propel chip development is when all objects become “smart.” He considers that a better term than AI, given all the misconceptions and stigmas attached to AI.

Synopsys and Cadence may have an opportunity to help with the design of all those custom chips that will increasingly vie with the chips and other parts made by Nvidia, AMD, and Xilinx....MORE