Friday, December 30, 2011

2011 Buh-Bye

From Jib Jab:

Best local News Bloopers of 2011

Thanks to a reader.

I are an Idot: I forget to Post and the Stock Jumps 9% Edition (JRCC)

Blame it on the Holidays, early morning meetings, whatev.
From What's Trading, December 29th, 2011 12:46 p:m:

James River Coal (JRCC) adds 24 cents to $6.53 and options action on the coal producer is heating up today. June 7 calls, which are 7.2 percent out-of-the-money, are the most actives. The flow includes two sweeps of 1350 contracts (2700 total) for $1.275 when the market was $1.15 to $1.30. Volume is now 5140 against just 12 contracts in open interest. June $10, June $12, May 8 and May 10 calls on JRCC are seeing interest as well and implied volatility is up 8.5 percent to 84. Some investors might be expecting the stock to rebound during the first half of 2012 after a dismal performance in 2011. Shares are off 74.3 percent year-to-date.
The stock is now trading at $6.98, up 8.89%.
Sorry about that. Don't chase.

Ethanol: Rye Whiskey Becoming Cult Object

From the Wall Street Journal:
F. Martin Ramin for The Wall Street Journal
Think of rye as bourbon's edgier cousin.

You order an Old Fashioned. The bartender asks, "What kind of bourbon?" You say, "Bourbon?" mildly offended, as if Pandora started playing Coldplay when you typed in "Radiohead." No, no, no. You'd prefer something with more backbone and boldness. But, you know, refined and complex, too. You ask, "Got any rye?"

If you've had this kind of exchange, congratulations, you are a fellow member of the Rye Whiskey Fan Club. I raise my glass of Van Winkle Family Reserve to you. If not, then you really must join the group—or, let's be honest, cult. Because once you become indoctrinated—it just takes a sip—leaving may require the work of a deprogrammer. Seriously. People go bananas over this stuff. What other whiskey suffers periodical shortages because cases are snatched up before they're even made? Why do recently released bottles quickly find their way onto eBay at enormously inflated prices as if they were this season's must-have Christmas toy? Why do I habitually pop into random liquor stores to see if, on the off chance, they have my favorite rare bottle collecting dust somewhere?

The explanation for the rabid following is stupid simple: Rye is damn good stuff. Think of it as bourbon's edgier cousin. Where bourbon is primarily made of corn, giving the whiskey a smooth and sweet flavor profile, rye is at least 51% of its namesake grain, lending it a spicier, fuller bodied, angular taste. If you like bourbon, but want to try something with more muscle, you need to get yourself some rye.

Although it's America's first whiskey—George Washington distilled it and bottles were as good as cash in 18th-century Pennsylvania—rye steadily fell out of popularity after Prohibition. It wasn't until the early 2000s that it became repopularized thanks mostly to craft bartenders who liked rye's robust flavors in cocktails, as well as its historical accuracy—rye was the original whiskey in classics like the Manhattan and the Sazerac.....MORE

"Corn, cotton futures offer chance of hefty gains"

I'm not so sure about corn but am intrigued as all get out by cotton.*
Corn 645 up 7 cents, cotton 91.61 down .02
From Agrimoney:
Corn, lifted by relatively short supplies, and cotton, helped by a Chinese market support programme, look top bets among agricultural commodities next  year, offering investors the prospect for gains above 25%.
Corn looks set to return above $7 a bushel by the second half of next year boosted by strong demand from all three major consumers - livestock feeders, ethanol plants and importers, Commerzbank said.
Indeed, this will be enough to keep supplies tight even if the South American corn harvest escapes significant damage feared from this month's dry and hot spell, and if US plantings rise in 2012 to a 68-year high, as currently expected.
"Even if the corn acreage is being expanded, corn should remain in relatively short supply given the robust demand," Commerzbank said.
Corn prices will rise sufficient to regain a significant, if historically unusual, premium over fellow grain wheat, averaging $7.20 a bushel in the last quarter next year – implying gains of more than one-quarter for investors buying Chicago's December 2012 corn contract....
...Chinese buying
Among soft commodities, cotton has potential for handing investors strong gains, with the bank forecasting that investors are being too gloomy in foreseeing New York futures prices remaining below 90 cents a pound.
Lower prices will, in dissuading farmers from planting the fibre, keep supplies in check, pointing to firmer values, which will also be encouraged by a policy in China, the top cotton producer, consumer and importer, of buying up supplies.
"State authorities are currently buying cotton on the domestic market at the equivalent of 140 cents a pound and thus at significantly higher prices than on the world market.
"Chinese manufacturers will therefore increasingly resort to the cheaper cotton on the global market."
The bank forecast cotton prices reviving to average 110 cents a pound in the last half of 2012 – also implying gains of more than one-quarter for investors....MORE
 *See (Dec. 15): 
...So what does it mean for investors?
Back in September we posted "Pray for Texas (and maybe buy some cotton futures): 'Historic La Nina imminent?". Since then cotton futures have drifted lower:


but the trade is definitely worth being aware of. A reasonable target would be the bottom of the chart gap in the 130 area a ~50% move from this morning's 85.680.

Cambridge Puts Newton’s Papers & Annotated Principia Online!

From OpenCulture:


Cambridge University has had many famous graduates, but perhaps none is more famous than Isaac Newton (class of 1665). This week, Cambridge continues to honor Newton by opening a digital archive of Newton’s personal papers, which includes an annotated copy of the Principia, the landmark work where the physicist developed his laws of motion and gravity. The initial archive features 4,000 pages of scanned materials (roughly 20% of the complete Newton archive), and eventually Cambridge will add material from Charles Darwin, another famous alum, and other scientific figures....MORE

See also:
"Royal Society opens archive, kills productivity" (Newton's First Published Paper; Franklin and the Kite, etc.)

"Commodities Poised for First Annual Decline Since 2008 on European Crisis"

From Bloomberg:

Commodities (SPGSCITR) headed for the first annual drop since 2008, paced by declines in cotton, copper and cocoa, on concern that the sovereign-debt crisis in Europe and a cooling Chinese economy will sap demand for raw materials.

The Standard & Poor’s GSCI Total Return Index (SPGSCITR) of commodities was little changed at 4,895.4 at 10:37 a.m. in New York, down 1 percent for 2011. Cocoa plunged 31 percent in 2011 on signs of expanding supplies from Ivory Coast, the world’s biggest grower. Cotton fell 37 percent this year amid rising output and dwindling demand. Copper, often seen as an indicator of economic activity it is used in building construction and automobiles, is set for the first loss since 2008....MORE

"EPA seeks expanded power via ‘sustainable development’"

From the Western Farm Press:
EPA wants to change how it analyzes problems and makes decisions in a way that will give it expanded power to regulate businesses, communities, and ecosystems in the name of “sustainable development,” according to a news report. Much of the thought behind this idea comes from a study, “Sustainability and the U.S. EPA,” that EPA commissioned last year from the National Academies of Science (NAS) and published in August.

The study’s panel declares part of its job to be “providing guidance to EPA on how it might implement its existing statutory authority to contribute more fully to a more sustainable-development trajectory for the United States”, that is, how to use existing laws to new ends. According to NAS, the sustainability study “both incorporates and goes beyond an approach based on assessing and managing the risks posed by pollutants that has largely shaped environmental policy since the 1980s.”

According to the study, the adoption of the new “sustainability framework” will make the EPA more “anticipatory” in its approach to environmental issues, broaden its focus to include both social and economic as well as environmental “pillars,” and “strengthen EPA as an organization and a leader in the nation’s progress toward a sustainable future.”

EPA Administrator Lisa Jackson has said that sustainability is “the next phase of environmental protection” and “fundamental to the future of the EPA.” She described the new approach as “the difference between treating disease and pursuing wellness.”...MORE
This sounds a lot like the U.N.'s "Agenda 21" although Administrator Jackson doesn't mention the U.N. plan.
Here's Wikipedia:
Agenda 21 is an action plan of the United Nations (UN) related to sustainable development and was an outcome of the United Nations Conference on Environment and Development (UNCED) held in Rio de Janeiro, Brazil, in 1992. It is a comprehensive blueprint of action to be taken globally, nationally and locally by organizations of the UN, governments, and major groups in every area in which humans directly affect the environment....MORE
What I'm trying to figure out is how President Obama's Executive Order 13575 ties into all this:
Executive Order 13575—Establishment of the White House Rural Council 
June 9, 2011
By the authority vested in me as President by the Constitution and the laws of the United States of America and in order to enhance Federal engagement with rural communities, it is hereby ordered as follows:

Section 1. Policy. Sixteen percent of the American population lives in rural counties. Strong, sustainable rural communities are essential to winning the future and ensuring American competitiveness in the years ahead. These communities supply our food, fiber, and energy, safeguard our natural resources, and are essential in the development of science and innovation. Though rural communities face numerous challenges, they also present enormous economic potential. The Federal Government has an important role to play in order to expand access to the capital necessary for economic growth, promote innovation, improve access to health care and education, and expand outdoor recreational activities on public lands.

To enhance the Federal Government's efforts to address the needs of rural America, this order establishes a council to better coordinate Federal programs and maximize the impact of Federal investment to promote economic prosperity and quality of life in our rural communities....
The startling thing about this executive order is the number of Cabinet level members it has:
Sec. 3. Membership. (a) The Secretary of Agriculture shall serve as the Chair of the Council, which shall also include the heads of the following executive branch departments, agencies, and offices:
(1) the Department of the Treasury;
(2) the Department of Defense;
(3) the Department of Justice;
(4) the Department of the Interior;
(5) the Department of Commerce;
(6) the Department of Labor;
(7) the Department of Health and Human Services;
(8) the Department of Housing and Urban Development;
(9) the Department of Transportation;
(10) the Department of Energy;
(11) the Department of Education;
(12) the Department of Veterans Affairs;
(13) the Department of Homeland Security;
(14) the Environmental Protection Agency;
(15) the Federal Communications Commission;
(16) the Office of Management and Budget;
(17) the Office of Science and Technology Policy;
(18) the Office of National Drug Control Policy;
(19) the Council of Economic Advisers;
(20) the Domestic Policy Council;
(21) the National Economic Council;
(22) the Small Business Administration;
(23) the Council on Environmental Quality;
(24) the White House Office of Public Engagement and Intergovernmental Affairs;
(25) the White House Office of Cabinet Affairs; and such other executive branch departments, agencies, and offices as the President or the Secretary of Agriculture may, from time to time, designate....MORE
Simply amazing.

"Obama and Geithner: Government, Enron-Style"

From Rolling Stone's Taibblog:
Strongly recommend this piece at the Huffington Post by Jeff Connaughton, a former aide to Senator Ted Kaufman. Jeff is one of the smartest guys on the Hill and is particularly strong on issues surrounding Wall Street and the regulatory system. In this piece, he takes apart the oft-stated mantra that what Wall Street firms did during and after the crisis was maybe unethical, but not illegal.
He takes particular aim at Barack Obama, who recently tossed that line out on 60 Minutes in what I thought was one of the real low moments of his presidency. Here’s Jeff’s take:
Speaking in Kansas on December 6, [Obama] said, "Too often, we've seen Wall Street firms violating major anti-fraud laws because the penalties are too weak and there's no price for being a repeat offender." Just five days later on 60 Minutes, he said, "Some of the least ethical behavior on Wall Street wasn't illegal." Which is it? Have there been no prosecutions because Wall Street acted legally (albeit unethically)? Or did Wall Street repeatedly violate major anti-fraud laws (and should thus find itself in the dock)?
The President is confusing "legal" with "difficult to prosecute successfully."
The notion that what Wall Street firms did was merely unethical and not illegal is not just mistaken but preposterous: most everyone who works in the financial services industry understands that fraud right now is not just pervasive but epidemic, with many of the biggest banks committing entire departments to the routine commission of fraud and perjury – every single one of the major banks, for instance, devotes significant manpower to robosigning affidavits for foreclosures and credit card judgments, acts which are openly and inarguably criminal.

Banks and hedge funds routinely withhold derogatory information about the instruments they sell, they routinely trade on insider information or ahead of their own clients’ orders, and corrupt accounting is so rampant now that industry analysts have begun to figure in estimated levels of fraud in their examinations of the public disclosures of major financial companies....MORE

Why there's so much money in US politics

From the Adam Smith Institute's Pin Factory blog:
Well, yes, obviously, as PJ O’Rourke pointed out, the reasons there's so much money in US politics is because as soon as you let the politicians decide what can be bought and sold it will be the politicians being bought and sold. And the level to which politics decides what can be bought and sold shocks even me and I've worked over there. Try this:
U.S. officials will soon weigh in on a fight between companies that want to export some of America's fast-growing supply of natural gas and big manufacturers that oppose the exports because they rely on cheap domestic gas. In the next few weeks, Washington's number-crunchers are set to estimate whether exports would cause U.S. prices to swell—a finding they will use in deciding the fate of more than a half-dozen projects across the nation. The battle, which pits manufacturers such as Dow Chemical Co. against energy producers like ConocoPhillips, shows how the boom in U.S. fossil-fuel production is upending markets and forcing policy makers into decisions they didn't imagine facing just a few years ago.

So, that huge rise in gas supplies, those falls in prices, as a result of fracking. Excellent stuff, so, given that the price abroad can be three times what it is in the US, some producers are talking about exporting it as LNG. Excellent stuff.
Except, except, WHAT? the government is seriously studying the question of banning such exports? At the behest of those US companies that buy the gas currently? WHAT?

This gas is private property. To be disposed of in the manner the the current owner wishes to. We also have a method of influencing that owner: it's called the price system. The moment we let the politicians decide what may or may not be exported we of course create the opportunity for some to make billions by offering politicians millions (yes, politicians really are that cheap).

It also gets worse. There won't be a blanket ban on exports, one company already has a license. So there will be politically favoured companies that are allowed to export and there will be politically unfavoured ones that will not. I know of another country that has this system for natural gas exports, Russia, through Gazprom. And believe me, it really isn't a pretty sight at all, partly because Russian politicians aren't as cheap as American ones....MORE

Brain Pickings: Best History Books 2011

From Brain Pickings:

What African drum languages have to do with women’s emancipation, radioactivity, and the future of the web.
The future of information can’t be complete without a full understanding of its past. That, in the context of so much more, is exactly what iconic science writer James Gleick explores in The Information: A History, a Theory, a Flood — the book you’d have to read if you only read one book this year. Flowing from tonal languages to early communication technology to self-replicating memes, Gleick delivers an astonishing 360-degree view of the vast and opportune playground for us modern “creatures of the information,” to borrow vocabulary from Jorge Luis Borges’ much more dystopian take on information in the 1941 classic, “The Library of Babel,” which casts a library’s endless labyrinth of books and shelves as a metaphor for the universe.

Gleick illustrates the central dogma of information theory through a riveting journey across African drum languages, the story of the Morse code, the history of the French optical telegraph, and a number of other fascinating facets of humanity’s infinite quest to transmit what matters with ever-greater efficiency.
We know about streaming information, parsing it, sorting it, matching it, and filtering it. Our furniture includes iPods and plasma screens, our skills include texting and Googling, we are endowed, we are expert, so we see information in the foreground. But it has always been there.” ~ James Gleick
But what makes the book most compelling is that, unlike some of his more defeatist contemporaries, Gleick roots his core argument in a certain faith in humanity, in our moral and intellectual capacity for elevation, making the evolution and flood of information an occasion to celebrate new opportunities and expand our limits, rather than to despair and disengage.

Gleick concludes The Information with Borges’ classic portrait of the human condition:
We walk the corridors, searching the shelves and rearranging them, looking for lines of meaning amid leagues of cacophony and incoherence, reading the history of the past and of the future, collecting our thoughts and collecting the thoughts of others, and every so often glimpsing mirrors, in which we may recognize creatures of the information.”
Originally featured here in March.
Poggio Bracciolini is the most important man you’ve never heard of.
One cold winter night in 1417, the clean-shaven, slender young man pulled a manuscript off a dusty library shelf and could barely believe his eyes. In his hands was a thousand-year-old text that changed the course of human thought — the last surviving manuscript of On the Nature of Things, a seminal poem by Roman philosopher Lucretius, full of radical ideas about a universe operating without gods and that matter made up of minuscule particles in perpetual motion, colliding and swerving in ever-changing directions. With Bracciolini’s discovery began the copying and translation of this powerful ancient text, which in turn fueled the Renaissance and inspired minds as diverse as Shakespeare, Galileo, Thomas Jefferson, Einstein and Freud.
In The Swerve: How the World Became Modern, acclaimed Renaissance scholar Stephen Greenblatt tells the story of Bracciolini’s landmark discovery and its impact on centuries of human intellectual life, laying the foundations for nearly everything we take as a cultural given today.
This is a story [of] how the world swerved in a new direction. The agent of change was not a revolution, an implacable army at the gates, or landfall of an unknown continent. […] The epochal change with which this book is concerned — though it has affected all our lives — is not so easily associated with a dramatic image.”
Central to the Lucretian worldview was the idea that beauty and pleasure were worthwhile pursuits, a notion that permeated every aspect of culture during the Renaissance and has since found its way to everything from design to literature to political strategy — a worldview in stark contrast with the culture of religious fear and superstitions pragmatism that braced pre-Renaissance Europe. And, as if to remind us of the serendipitous shift that underpins our present reality, Greenblatt writes in the book’s preface:
It is not surprising that the philosophical tradition from which Lucretius’ poem derived, so incompatible with the cult of the gods and the cult of the state, struck some, even in the tolerant culture of the Mediterranean, as scandalous […] What is astonishing is that one magnificent articulation of the whole philosophy — the poem whose recovery is the subject of this book — should have survived. Apart from a few odds and ends and secondhand reports, all that was left of the whole rich tradition was contained in that single work. A random fire, an act of vandalism, a decision to snuff out the last trace of views judged to be heretical, and the course of modernity would have been different.”
Illuminating and utterly absorbing, The Swerve is as much a precious piece of history as it is a timeless testament to the power of curiosity and rediscovery. In a world dominated by the newsification of culture where the great gets quickly buried beneath the latest, it’s a reminder that some of the most monumental ideas might lurk in a forgotten archive and today’s content curators might just be the Bracciolinis of our time, bridging the ever-widening gap between accessibility and access.
Wait, how can a book be among the year’s best art and design books, best science books, and best history books? Well, if it’s Radioactive: Marie & Pierre Curie: A Tale of Love and Fallout, it can. In this cross-disciplinary gem, artist Lauren Redniss tells the story of Marie Curie — one of the most extraordinary figures in the history of science, a pioneer in researching radioactivity, a field the very name for which she coined, and not only the first woman to win a Nobel Prize but also the first person to win two Nobel Prizes, and in two different sciences — through the two invisible but immensely powerful forces that guided her life: radioactivity and love. It’s remarkable feat of thoughtful design and creative vision. To honor Curie’s spirit and legacy, Redniss rendered her poetic artwork in cyanotype, an early-20th-century image printing process critical to the discovery of both X-rays and radioactivity itself — a cameraless photographic technique in which paper is coated with light-sensitive chemicals. Once exposed to the sun’s UV rays, this chemically-treated paper turns a deep shade of blue. The text in the book is a unique typeface Redniss designed using the title pages of 18th- and 19th-century manuscripts from the New York Public Library archive. She named it Eusapia LR, for the croquet-playing, sexually ravenous Italian Spiritualist medium whose séances the Curies used to attend. The book’s cover is printed in glow-in-the-dark ink.

Redniss tells a turbulent story — a passionate romance with Pierre Curie (honeymoon on bicycles!), the epic discovery of radium and polonium, Pierre’s sudden death in a freak accident in 1906, Marie’s affair with physicist Paul Langevin, her coveted second Noble Prize — under which lie poignant reflections on the implications of Curie’s work more than a century later as we face ethically polarized issues like nuclear energy, radiation therapy in medicine, nuclear weapons and more.

Full review, with more images and Redniss’s TEDxEast talk, here.
Hedy’s Folly: The Life and Breakthrough Inventions of Hedy Lamarr, the Most Beautiful Woman in the World tells the fascinating story of a Hollywood-starlet-turned-inventor whose radio system for remote-controlling torpedoes laid the foundations for technologies like wifi and Bluetooth. But her story is also one of breaking free of society’s expectations for what inventors should be and look like. After our recent review, reader Carmelo “Nino” Amarena, an inventor himself, who interviewed Lamarr in 1997 shortly before her death, captures this friction in an email:
Ever since I found out back in 1989 that Hedy had invented Spread Spectrum (Frequency Hopping type only), I followed her career historically until her death. My interview with her is one of the most notable memories I have of speaking with an inventor, and as luck would have it, she was underestimated for nearly 60 years on the smarts behind her beauty. One of the things she said to me in our 1997 talk was, ‘my beauty was my curse, so-to-speak, it created an impenetrable shield between people and who I really was’. I believe we all have our own version of Hedy’s curse and trying to overcome it could take a lifetime.”
In 1937, the dinner table of Fritz Mandl — an arms dealer who sold to both sides during the Spanish Civil War and the third richest man in Austria — entertained high-ranking Nazi officials who chatted about the newest munitions technologies. Mandl’s wife, a twenty-four-year-old former movie star, whom he respected but also claimed “didn’t know A from Z,” sat quietly listening. Hedy Kiestler, whose parents were assimilated Jews, and who would be rechristened by Louis B. Meyer as Hedy Lamarr, wanted to escape to Hollywood and return to the screen. From these dinner parties, she knew about about submarines and wire-guided torpedoes, about the multiple frequencies used to guide bombs. She knew that she had present herself as the glamorous wife of an arms dealer. And she knew that in order to leave her husband, she would have to take a good amount of this information with her.

An MGM studio portrait of Hedy Lamarr, 1938
Hedy’s story is intertwined with that of American composer George Antheil, who lived during the 1920s with his wife in Paris above the newly opened Shakespeare and Company, and who could count among his friends Man Ray, Ezra Pound, Louise Bryant, and Igor Stravinsky. When Antheil attended the premiere of Stravinsky’s Les Noces, the composer invited him afterward to a player piano factory, where he wished to have his work punched out for posterity. There, Antheil conceived of a grand composition for sixteen player pianos, bells, sirens, and several airplane propellers, which he called his Ballet mecanique. When he premiered the work in the US, the avant-garde composition proved a disaster.

Composer George Antheil during the 1920s in Paris, when he was living above the newly founded Shakespeare & Co with his wife.
Antheil and his wife decamped for Hollywood, where he attempted to write for the screen. When Antheil met Hedy, now bona fide movie star, in the summer of 1940 at a dinner held by costume designer Adrian, they began talking about their interests in the war and their backgrounds in munitions (Antheil had been a young inspector in a Pennsylvania munitions plant during World War I.) Hedy had been horrified by the German torpedoing of two ships carrying British children to Canada to avoid the Blitz, and she had begun to think about a way to control a torpedo remotely, without detection.
Hedy had the idea for a radio that hopped frequencies and Antheil had the idea of achieving this with a coded ribbon, similar to a player piano strip. A year of phone calls, drawings on envelopes, and fiddling with models on Hedy’s living room floor produced a patent for a radio system that was virtually jam-proof, constantly skipping signals.

The patent filed in 1941 by Hedy and Antheil for a 'secret communication system'
Antheil responded to Hedy’s enthusiasm, although he thought her sometimes scatterbrained, and Hedy to Antheil’s mechanical focus as a composer. The two were always just friends and respected one another’s quirks. Antheil wrote to a friend about a new scheme Hedy was planning with Howard Hughes:
Hedy is a quite nice, but mad, girl who besides being very beautiful indeed spends most of her spare time inventing things—she’s just invented a new ‘soda pop’ which she’s patenting—of all things!”

In the center, Heddy Lamarr, with George Antheil to the right and his wife Boski Antheil to the left
Hedy’s Folly isn’t the story of a science prodigy or a movie star with a few hobbies, it’s a star-studded picaresque about two undeniably creative people whose interests and backgrounds unlocked the best in one another — the mark of true inventors.
Adapted from Michelle Legro’s fantastic full review.
Seven MORE

Thursday, December 29, 2011

Marc Faber says the whole derivatives market will one day cease to exist, 'will become zero'

Via a reader.
From Business Intelligence Middle East:
Marc Faber the Swiss fund manager and Gloom Boom & Doom editor recently discussed his 2012 predictions. In a nutshell, he expects politicians in the US and the EU to keep on addressing symptoms rather than dealing with the fundamental problems of the crisis.

He can smell more money printing and sees less prosperity - to the point that within 5 years many investments could lose 50% of their value.

"You can increase debt but it doesn't increase prosperity or economic growth," he says. He predicts the collapse of the derivatives market - down to zero - and favors equities and gold.

QE3 and equities
Speaking in an interview with Jeanne Yurman of Reuters on the sidelines of the IndexUniverse’s 4th Annual “Inside Commodities” conference held on December 8 at the New York Stock Exchange, Faber said: "There is no doubt that QE3 will come in one form or the other, and in Europe also".
"They will monetize," he stressed.

Because of impending additional quantitative easing, Faber, who predicted the stock market crash in 1987 and turned bearish shortly before the 2007-2009 bear market, is less bearish on equities now.
If the S&P drops 10%-15% here [the US] and in Europe, "they are going to print money," he predicted.

Addressing symptoms: The limit of Keynesian policies
Faber sees more can-kicking and more avoidance of real solutions through additional fiscal deficits and money printing in 2012.

"When the EU [and the eurozone] were formed, in the Maastricht treaty it was stated that no country should have a fiscal deficit of more than 3% and the debt to GDP ratio should not exceed 60%, but nobody kept that promise, Faber reminded his host.

The first one to violate [the rules] was Germany, he added.

When you look at what happened subsequently where countries had huge expansions in debt/GDP, you have to ask yourself what did these bureaucrats do all day? asked Faber....MORE
A fair question.

Questions Americans Want Answered: "Arabica coffee prices - what does 2012 hold?" (Commerzbank; Goldman; Morgan Stanley Weigh in)

From AgriMoney:
Arabica coffee, as traded in New York, is on track to fall some 8% in 2011, a better performance than managed by most other soft commodities, but a poor result compared with the rise of more than 75% in 2010.
Besides the weaker global economic outlook, prices have been held back by a bumper crop for an "off" year in Brazil, the top producer, where arabica output has alternately higher and lower years.
But output in Colombia, the second-ranked arabica producer, has – again – disappointed, thanks to poor weather.
Brokers below give their forecasts for 2012.
"Arabica coffee… should in our opinion remain above 200 cents a pound in 2012 – a high price level, historically speaking – even if the peaks of 300 US cents a pound seen in 2011 are likely to be a thing of the past. 
"High-quality arabica beans in particular could remain in short supply, due to the continuing precarious situation in Colombia.

"A positive factor is that Brazil is poised for a high-yielding crop year in the biennial cycle and Brazilian beans are now also approved for delivery to the New York exchange.

"[But] Brazil had to struggle with a drought between May and September, which hampered the growth of the beans to the extent that no new record will be possible in the next harvest which begins next May

"The fact therefore remains that the global coffee market has been in deficit for years, and at best the forthcoming 2012-13 season could end with supply and demand roughly in balance."

Goldman Sachs

"We expect lower global 2011-12 production (on Brazil's off-year of the arabica plant's two-year cycle), strong emerging market demand growth and low beginning stocks to keep prices elevated....MORE
Also at AgriMoney:   

MF Global COO Abelow is Chairman of the EPA's Financial Advisory Board (MFG; WTF)

It just gets better and better.
From the Washington Times:
MF Global chief missing $1.2B is financial adviser to EPA
During two days of recent congressional hearings into how as much as $1.2 billion disappeared from MF Global customer accounts, the chief operating officer of the imploding investment firm responded again and again that he did not know.

Yet as the House and Senate interrogated Bradley I. Abelow and other top executives at MF Global Holdings Ltd., lawmakers did not mention Mr. Abelow’s role as a financial adviser for the Environmental Protection Agency, which as of Tuesday listed him as the chairman of its financial advisory board.

Even as he finds himself the public face of a bankruptcy and admitted to lawmakers that he had no idea how client funds disappeared, Congress and the administration have voiced no public concern about Mr. Abelow’s role advising the $8.6 billion government agency on its finances.

EPA relying on Wall Street for financial guidance is like the blind leading the blind,” said Jeff Ruch, president of Public Employees for Environmental Responsibility, a nonprofit environmental advocacy group based in Washington.

“In Abelow, you have a Wall Street executive who just presided over the disappearance of $1 billion in investor funds purporting to help guide federal infrastructure financing.”

The EPA did not respond to multiple messages concerning Mr. Abelow’s status with the board, though the EPA’s website still reports that he is its chairman and notes his job at MF Global....MORE

Corzine & Co. Were Raiding Customer Accounts Earlier Than Previously Thought (MFG)

From DealBook:
MF Global Scrutinized on Money Move
Federal authorities investigating the demise of MF Global think that the firm began improperly moving customer money to a middleman on Oct. 27, according to people briefed on the matter.

The transfers, which indicate the brokerage firm misused client money earlier than previously believed, represent a new line of inquiry in the hunt for more than $1 billion in missing money.

In MF Global’s last days, the brokerage house was frantically winding down trades to shore up its balance sheet and stave off bankruptcy. Investigators are examining whether the firm — as part of that effort — began moving client money to the Depository Trust & Clearing Corporation, a financial intermediary responsible for closing out some of MF Global’s transactions, these people say.

The new details bolster claims that MF Global was careless with customer money, regardless of the company’s intentions. Authorities previously found that MF Global had used roughly $200 million of client funds to replenish an overdrawn account at JPMorgan Chase in London on Oct. 28, the last business day before the firm filed for bankruptcy.

Now, investigators are also looking at billions of dollars of transfers from MF Global to the Depository Trust & Clearing Corporation, a fraction of which is believed to be customer money. People briefed on the matter say the middleman passed some of the money to banks and other firms that traded with MF Global, which was once run by Jon S. Corzine, the former governor of New Jersey.

In addition, federal authorities are reviewing whether MF Global used customer money to pay the clearing corporation as part of a margin call. Financial intermediaries routinely require extra collateral when firms run into trouble. A different clearinghouse in London forced MF Global to pay roughly $300 million to back some of its bond holdings during its last week.

It is unclear how much customer money was transferred to the Depository Trust & Clearing Corporation, and whether officials at MF Global knew they were using client money. Haphazard recordkeeping and the flood of transactions in its final days might have concealed whether MF Global was deploying the customer cash for firm needs....MORE

Ya Say Ya Want a Revolution: "Anonymous - Survival Guide for Citizens in a Revolution"

From Anonymous via ZeroHedge:
 Following the fireworks from this weekend in which Anonymous hacked and exposed thousands of Stratfor clients and millions of confidential emails, it may be time to pay some more attention to the hacker collective, and specifically a document that was released a few weeks ago titled "Survival Guide for Citizens in a Revolution." As Anonymous itself says, "This is a snapshot of what Anonymous thinks will be useful for your survival in case of a violent revolution in your country....

Anonymous Survival Guide for Citizens in a Revolution

NatGas: Wilbur Ross is Buying.....(XCO)

After flatlining in the $20-21 range for the first half of the year the stock collapsed, trading recently at $10.00, up 39 cents:
Chart forEXCO Resources Inc. (XCO)

From Insider Monkey:
Wilbur Ross’s Invesco Private Capital (WL Ross & Co) recently reported its insider purchases in Exco Resources Inc. (XCO). The firm bought 363 thousand shares in XCO at between $9.66 and $9.84 on December 21st. WL Ross & Co revealed 27.63 million shares in the stock at the end of September, and 26.78 million shares or 12.5% activist stake on August 31st. XCO is now trading at $9.81. The stock has lost about 49% so far in 2011....MORE
We haven't had much on Mr. Ross in recent months but he is definitely worth paying attention to.
His former niche, financially distressed companies, is to my mind, one of the most dangerous fields in finance, fraught with dangers that can wipe out an investment unless you have examined every detail and anticipated every contingency. I once said that W.L.R. was probably smarter than Warren Buffett.

Some of our prior posts:

January 2008 
Follow-up: The bond insurers, a $200bn problem and Wilbur Ross (ABK; MBI; BRK.A)
...the hot new boy-band:
Wilbur & The Monolines.

July 8, 2008 (peak o'the bubble was July 11, $147.27) 
Wilbur Ross: Run-Up in Oil Prices Is a Bubble

July 16, 2008 
Seeing Oil Bubble, a Contrarian Bets on an Indian Airline

Sept. 25, 2008 
Bailout will encourage stupid acts by big firms, says Wilbur Ross (AGO)

Aug. 4, 2010 
Charlie Rose: Face to face with Wilbur Ross

Dec. 10, 2010  
Wilbur Ross Thinks Celtic Tiger Still Has Fangs

Aug. 16, 2011 
Wilbur Ross Ross Sees End to Slump in Shipping (FRO; TNK; NAT)

"The IPO Class of 2011: An Annotated Guide" (Five largest)

The Wall Street Journal's Deal Journal blog has been on fire this week, enough so that I am perilously close to breaking our loosely enforced "One link per source per day" rule.
Here's an example:

Yes, 2011 was another year of IPO blahs. Two-thirds of newly public companies are underwater while the stock market is flat, companies had to scrape and claw to go public after July and proceeds from IPOs trailed last year’s levels.

Deal Journal is digging deeper into the biggest U.S.-listed offerings from the IPO class of 2011, to give you an annotated guide to the high-profile stock debuts.

Here are the five-biggest IPOs listed in the U.S. this year, ranked by the amount of money raised in the first batch of stock sales.

1) HCA Holdings, March/$4.35 Billion
2) Kinder Morgan, February/$3.29 Billion
3) Nielsen, Jan./$1.9 Billion

The three biggest IPOs of the year were buyout-boom babies during the 2005 to 2007 bubble for private-equity takeovers. The 2006 takeover of HCA was the third-biggest buyout deal of alltime at $21 billion, and then it became the biggest-ever IPO of a company owned by PE firms....MORE

"The Great Ricardian Equivalence Throwdown!"

A twofer. First up, Noahopinion:

Y'all know I cannot resist wading into a good macro throwdown.

This week's econ-blogosphere mayhem started when Paul Krugman wrote a post about the idea of Ricardian Equivalence (the idea that the timing of taxes doesn't matter), and why it doesn't imply that fiscal stimulus can't work. As an example of someone who does think that Ricardian Equivalence makes stimulus a non-starter, Krugman cited some remarks by uber-macroeconomist Robert Lucas:
But, if we do build the bridge by taking tax money away from somebody else, and using that to pay the bridge builder — the guys who work on the bridge — then it’s just a wash. It has no first-starter effect. You apply a multiplier to the bridge builders, then you’ve got to apply the same multiplier with a minus sign to the people you taxed to build the bridge. And then taxing them later isn’t going to help, we know that.
Krugman's argument: Ricardian Equivalence says that the timing of taxes can't matter for the economy, not that the level of government spending can't matter.

Mark Thoma concurred: Ricardian Equivalence does not say that stimulus can't work, and Ricardian Equivalence is wrong anyway. But if it were right, it would only be an argument against tax-rebate stimulus, not against government-expenditure stimulus.

Then Krugman came under fire from David Andolfatto, who says that Lucas's statement was obviously not talking about Ricardian equivalence, and, hence, Krugman must not understand what Ricardian Equivalence is. Steve Williamson takes a somewhat less harsh line, saying that Krugman must not understand what Lucas was trying to say.

Krugman fired back, as did Andolfatto and Williamson. Much fun was had by all....MORE
And from New Monetarist Economics:
Ricardian Equivalance Heat 
Here's the latest word from Paul Krugman on Ricardian equivalence. First Lucas doesn't understand it. Now, not only does David Andolfatto not understand it, he can't read either. What's the world coming to? Who taught that idiot Andolfatto anyway? Send him back to Surrey for reading lessons. Maybe he should consider going back to drywalling.

Here's what Krugman says:
I accused Lucas of not understanding Ricardian equivalence. Here’s Lucas’s argument:

But, if we do build the bridge by taking tax money away from somebody else, and using that to pay the bridge builder — the guys who work on the bridge — then it’s just a wash. It has no first-starter effect. There’s no reason to expect any stimulation. And, in some sense, there’s nothing to apply a multiplier to. (Laughs.) You apply a multiplier to the bridge builders, then you’ve got to apply the same multiplier with a minus sign to the people you taxed to build the bridge. And then taxing them later isn’t going to help, we know that.

That’s saying that the spending response to expected future taxes leads to a fall in consumption that exactly offsets the expansionary fiscal policy. If that’s not a Ricardian equivalence argument, what is it?
What's Lucas saying? There's a bridge, it's funded by increasing taxes. Lucas says it doesn't make any difference that the government does this. He also says the answer doesn't change if the taxes that pay for the bridge are current taxes or future taxes. The last part of that is Ricardian equivalence....MORE

"Japanese firm creates humanoid robot to replace factory workers"

I'm not sure if these folks are ahead of or behind Foxconn, mentioned en passant in this story.*
From The Raw Story:

A humanoid robot called "Nextage," intended to replace or work alongside human factory workers. Image: Screenshot via YouTube.
Japanese firm Kawada Industries is on the leading edge of a growing industry that threatens to become a major disruptive force in the coming years: automated labor.

At a recent robot expo, Kawada showed off Nextage, a human-shaped robotic laborer the company says is intended to “work alongside” people. In actuality, the robot could end up replacing people whose job it is to carry out menial tasks on assembly lines. And at just 1,500 watts of power consumption while it is working — less than some hair dryers — the device or one like it could one day become a compelling alternative to sweat shop labor....MORE
iPhone Manufacturer Foxconn to Build an 'Intelligent Robotics Kingdom' in Taiwan (AAPL)

As U.S. Productivity “Surge” of 2007-09 Melts Away, Foxconn to Replace Workers With One Million Robots; Solves Suicide Problem

"Robot lawyers, human cashiers"
...First they came for the Foxconn drones, but I said nothing…

Swiss Economic Data Confirm European Weakness

Shhh, don't tell the Swiss I implied they're European.

From Strawberry Blonde's Market Summary:

Yet Another Indicator Confirming European Economic Weakness
A quick time-out from my mini-holiday to report this...

Data released today showed a further drop in the Swiss economy, as shown on the graph below (courtesy of It's a combined reading of 12 economic indicators related to banking confidence, production, new orders, consumer confidence, and housing. It's designed to predict the direction of the economy over the following 6 months. The impact tends to be significant, but varies from month to month. It's just another set of data that's been released lately which confirms weakening in the European economy.

(click to enlarge)

Dear Paul Krugman: Research Suggests Deflation Does Not Lead to a Depression

I don't mean to go all empirical on the Herr Professor Doktor, Doktor (or is it Doktor, Doktor Professor?)* so I'll pass along an observation. Under a gold standard prices were generally deflationary without getting all depressionary. 1873 and '93 were doozies though.

From History Squared:


Abstract: Are deflation and depression empirically linked? No, concludes a broad historical study of inflation and real output growth rates. Deflation and depression do seem to have been linked during the 1930s. But in the rest of the data for 17 countries and more than 100 years, there is virtually no evidence of such a link.

Here we see only 8 episodes with both deflation and depression. There are 65 episodes of deflation without depression and 21 of depression without deflation. Thus, 65 of 73 deflation episodes had no depression, and 8 of 29 depression episodes had no deflation.What is striking is that nearly 90% of the episodes with deflation did not have depression.

Bernanke’s entire modus operandi: trillion dollar give-a-ways to foreign and domestic banks, the inflation tax, financial repression, picking the pockets of savers while rewarding debtors, stem from an intense study of an…outlier, all in an effort to avoid the phantom menace that is deflation. All the problems from this nefarious happenstance can be solved by money printing. It’s flabbergasting...MORE
*Ah ha!
I knew the ever modest Krugster would have given us the low-down (or is it down low?):
Well, So Much For Lufthansa
In the Times:
Ms. Merkel, a former academic married to a professor, was being accused of belittling intellectual property theft and, by implication, the value of an advanced degree, which is not a purely academic matter in this country. Many jobs require such degrees in Germany, where, as is not the case in America, calling oneself doctor for having completed a thesis in, say, political science or art history, is not embarrassing but normal, even when filling out Lufthansa’s online booking forms. (The airline generously provides three levels of academic achievement for its overachieving countrymen: doctor, professor and professor doctor, skipping the extremely rare but not unheard-of German mouthful Herr Professor Doctor Doctor).
As someone who actually is Herr Professor Doktor Doktor (honorary degree from the Free University in Berlin), I’m feeling slighted.

As for Mr. Guttenberg, he should take the whole plagiarism thing in stride. In resigning, it was a far far better thing than he had ever done before; tomorrow is another day; and he has nothing to fear but fear itself.
Great-aunt Bernice, M.D. would only call a PhD or even a Sc.D. "Doctor" if they could set a kid's broken arm.
Or if she liked them.

Wednesday, December 28, 2011

"Plastics" To Survive, Some Biofuels Companies Give Up on Biofuels (GEVO)

Or "plasticity".
The Khosla-backed Gevo came public at $15 back in February. Given that they're based in Colorado, it's probably appropriate that the chart looks like a double black diamond run:

Last I saw, $5.63. Nice exit Mr. K.
From MIT's Technology Review:
Companies such as Gevo hope to become profitable by turning corn into chemicals.

Gevo, a prominent advanced-biofuels company that has received millions in U.S. government funding to develop fuels made from cellulosic sources such as grass and wood chips, is finding that it can't use these materials if it hopes to survive. Instead, it's going to use corn, a common source for conventional biofuels. What's more, most of the product from its first facility will be used for chemicals rather than fuel.

As the difficulty of producing cellulosic biofuels cheaply becomes apparent, a growing number of advanced-biofuels companies are finding it necessary to take creative approaches to their business, even though that means abandoning some of their green credentials, at least temporarily, and focusing on markets that won't have a major impact on oil imports. This is hardly the outcome the government hoped for when it announced cellulosic-biofuels mandates, R&D funding, and other incentives in recent years.

Cellulosic biofuels still cost much more to produce than either corn ethanol or gasoline. One reason is that startups have had trouble raising enough money to build the large-scale commercial plants needed to lower costs. That's in part because their technology is unproven, and in part because there's no guaranteed market for cellulosic biofuels yet....MORE
Mr. McGuire: I want to say one word to you. Just one word.
Benjamin: Yes, sir.
Mr. McGuire: Are you listening?
Benjamin: Yes, I am.
Mr. McGuire: Plastics.
Benjamin: Exactly how do you mean?
Mr. McGuire: There's a great future in plastics. Think about it. Will you think about it? 

-The Graduate

Remember When the Unluckiest Man in the World Won the Lottery?

A reader asked us to repost this piece, I couldn't tell if he was looking for inspiration or Schadenfreude.
Originally posted March 11, 2011:

Here's the version of the story told by ManInstitute
(your source for everything manly)

Frane Selak – Nothing Says Manly Like Cheating Death 6 Times
Frane Selak
Born 1929 in Croatia
Occupation Music Teacher
Background A lifetime of cheating death
Man Rating 8
There are many ways that a man can boost his man points. We are constantly researching and debating which method of achieving manliness is the most effective. Since all men have very different attributes and skill levels, it’s tough to decide on a single method of becoming the ultimate man. Guys like Simo Häyhä and Bear Grylls are on the right track with their approach; however, these are/were both highly trained individuals. Simo was an extremely skilled sniper who managed to rack up a kill count that today’s sharpshooters would drool over. Bear Grylls is former SAS and has several records including being the youngest Brit to ever climb to the top of Everest. Oh, and Bear did this just after finishing rehab for his back from surviving a 1600 foot fall when his parachute malfunctioned. Both Simo and Bear are/were survival experts and highly trained in being bad ass.

With juggernauts like these and countless other manly men out there, it really makes you wonder what an average everyday guy can do to knock his man ranking through the roof. Obviously he could do the little things like growing a sweet beard and playing sports, but these aren’t going to put you into a whole new class of manliness.
Frane Selak, a Croation music teacher, began his campaign to boost his man ranking in 1962. His campaign of extreme awesomeness consisted essentially of showing how real men can escape deadly situations. It is unconfirmed, but it is rumored that he heard that the Man Institute was in the works and felt the need to man up so he could later be an inspiration to real men everywhere.

In January of 1962, Frane boarded a train in Sarajevo. He was headed to Dubrovnik, likely to score with women and fist fight for fun. Frane was well on his way when the train derailed. It plunged into an icy-cold river, killing 17 of his fellow passengers and breaking Frane’s arm. Frane managed to escape the cold water with his life and a few well deserved man points.

In 1963, Frane was on a plane flying from Zagreb to Rijeka. The flight seemed to be going well when all of a sudden, the door blew off of the cockpit. Frane was ejected from the cockpit and miraculously landed in a haystack, suffering only minor cuts and bruises, while the plane crashed and killed 19 passengers.
In 1966, Frane was travelling on a bus which went off the road and plunged into a river. Familiar territory for Frane. He escaped with no injuries; however, 4 other passengers lost their lives.

In 1970, Frane was cruising in his car when he began having car trouble. Frane used his man-instincts and vacated the car, running from it as the faulty fuel-pump caused the car to burst into flames.

In 1973, Frane was again driving, only this time his car caught fire while he was in it. He managed to stop the car and evacuate, losing only his hair from the flames.

In 1995 Frane was crossing a street when an out of control city bus struck him sending him flying onto the concrete. Frane then got up and walked it off, suffering only minor injuries.

In 1996, Frane was driving when he found an out of control United Nations truck heading straight for him. Frane chose to drive his car off a cliff to avoid the head-on colission. Frane managed to free himself from his car and cling to a tree as his car plummeted 300 feet down the cliff and exploded.

After finishing this 44 year man point accumulation, Frane decided he had enough of cheating death and figured it was time to get rich and live the sweet life. He went and purchased a ticket for the Croation lottery and won $1 million....
Lucky, unlucky, it's all in how you look at it, right?

The Telegraph takes up the story

Frano Selak: 'world's luckiest man' gives away his lottery fortune
The 81 year-old won £600,000 five years ago in the lottery in Croatia, to celebrate his fifth marriage, after earlier surviving plane and train crashes.
He also survived other disasters including landing on a haystack after falling out of a plane door that had blown open.
Now the pensioner has decided that "money cannot buy happiness" and has decided to live a frugal life.
He has sold his luxury home on a private island, given away his fortune to family and friends and moved back to his modest home in Petrinja, which is south of Zagreb, in the centre of the country.
He kept the last bit of his winnings for a hip replacement operation so he could enjoy life with his wife and also so he could build a shrine to the Virgin Mary to give thanks for his luck....MORE

Trading Based on Classical Chart Patterns is Modern Alchemy

He can kiss his CTA goodbye.
From the Price Action Lab Blog:
Medieval alchemy aimed, amongst other things, at the transmutation of base metals into gold. Trading based on classical chart patterns, like triangles, head and shoulders, pennants, etc. is a form of modern alchemy because it aims at the transformation of simple geometrical shapes found on price charts into trading signals that generate profits. This fact alone does not imply that chart pattern analysis is useless. This type of analysis has different uses for different people, depending on their level of expertise and even investing power.
Whooboy. There goes the invite to the Society of Technical Analysts confab.
Why Chart Pattern Analysis is not a science
When traders study chart patterns they are never sure of the final outcome. Specifically it cannot be known in advance whether a chart pattern is a continuation or a reversal pattern. This can only be known on hindsight. Furthermore, the phenomena observed, i.e. the geometric formations on charts due to price action and subsequent prices moves, are not reproducible in a laboratory and thus the outcomes cannot be verified.
These facts contribute to the main reasons for chart analysis being more of a “modern alchemy” than science. In the macrocosm, there are laws that are confirmed experimentally and given the same initial conditions, the same phenomenon emerges with very high probability, almost certainty. For example, the law that objects fall to the ground with acceleration independent of their mass, the principle of Universal Gravitation, has been confirmed with accuracy of one part in a trillion in recent experiments. With chart patterns, given the same principle and initial conditions, different phenomena may emerge, for example an uptrend, a downtrend, sideways action or any combination thereof. This implies that any efforts to turn chart pattern analysis, or essentially the application of naive geometry to the study of price action, into a tool for profiting resemble those old attempts of turning chemistry into a tool of wealth by converting cheap metals into gold, known as alchemy. This is one reason we cannot also talk about rigid principles of technical analysis or founding principles. There are probably as many principles as presumed or self-proclaimed founders.

Chart analysis is not useless but it can be dangerous
The above stated facts by no means diminish the value of classical chart pattern analysis. It is only downgraded from the status of a science to the status of an art, if I may call it that. This further means that any gains from such analysis depend on how the individual who is using it perceives reality, her experience, intelligence and even investment power....MORE
Now AAPTA would like a word....

Model Free Investing (Equal weight vs cap-weighted) RSP

RSP is the symbol for the Rydex Equal Weight S&P 500 ETF.
I owe someone a hat tip on this but can't remember who although I'm guessing it was Abnormal Returns.
From Financial Advisor:
Is equal weighting’s agnostic view of asset-pricing theory an advantage?
By James Picerno   
Financial journalist Jason Zweig once asked Harry Markowitz how he manages his investment portfolio. “My intention,” he explained, “was to minimize my future regret. So I split my contributions 50/50 between bonds and equities.”

Why would the founding father of modern finance choose a naïve strategy of equal weighting over his own theory for designing portfolios? Markowitz won a Nobel prize for his quantitative framework that identifies the optimal portfolio—the one that maximizes expected return for a given level of risk. Perhaps his choice of portfolio strategy has something to do with the fact that his analytic brainchild is highly sensitive to the accuracy of the required forecasts of returns, volatility and correlations.

No wonder that the true efficient portfolio is the stuff of dreams. Mere mortals have trouble estimating the parameters that lead to optimization because the future is forever murky. What looks like an efficient portfolio on the computer screen has a habit of delivering sub-optimal results in practice.

Markowitz’s plug for equal weighting suggests that he’s well aware of the practical limitations that bedevil his famous theory. That’s no slur on his achievements, which are rightly extolled as the seminal development in lifting finance out of the dark ages. The fundamental advice in his seminal 1952 paper (and the more elaborate book-length treatment that followed in 1959) is still correct: Every investor should seek the ideal asset mix. The debate is over the details for pursuing that goal.

Modern software packages and various enhancements to Markowitz’s original framework can help smooth the rough edges. But the inherent dangers of forecasting aren’t so easily engineered away. In search of guidance, investors have long turned to asset-pricing models of one kind or another. The standard choice is the capital asset-pricing model (CAPM), in part because of its simplicity. CAPM reduces the complexities of finding Markowitz’s optimal portfolio to a simple idea: Buy the market. According to the one-factor CAPM, the efficient strategy is the value-weighted portfolio of all the securities in the targeted asset class (or all the asset classes for a broad asset allocation strategy)....MORE 
Earlier this month The Economist's Buttonwood's Notebook blog also looked at the little beasties
Equity investing
Should we give equal weight to equal-weighted indices?
A HEADLINE on Bloomberg claims (in typical Bloomberg-ese) there was "No Lost Decade for S&P 500 as Big-Cap Bias Masks Rally". The idea is that, if you equally weight stocks, then they have risen 66% over the last decade.

That may be true and I have argued in the past that there's a lot of scope for alternative ways of weighting portfolios than market values. The Robert Arnott approach, which weights stocks by "fundamentals" like sales and dividends, avoids the peril of market-value weighting, which leads investors to allocate most money to those stocks that are most fashionable, and thus likely to be too expensive.

The problem with this approach is that, by definition, not all investors can follow it. If we all equally weighted stocks then, well, all stocks would be equally-weighted. As it is, many stocks are quite small and illiquid so are difficult for big managers to own. Take the Fidelity Magellan fund which had $100 billion at its peak; divided equally among 500 stocks, that would be $200 million per holding. For the smaller stocks, the fund would have 20% of the equity; as it got in and out, it would move the price substantially....MORE