Tuesday, July 31, 2012

Westport Insider Buys Another $27 Mil. Worth Open Market (WPRT)

We've followed Mr. Douglas long enough that the intro to February's "Who is Kevin Douglas (and how much money does he have) AMSC; WPRT" is probably no longer true:
We've asked these questions before, Links below.
From Compounding My Interest:

Kevin Douglas – The Greatest Super Investor No One Knows

With everyone reading the 13fs filed last night, we see the quarterly drool-fest over what the super investors are doing.  While it’s interesting to see what others are buying, I find it most interesting to learn why it is they are doing that buying.  Sadly, one of my favorite super investors is a man named Kevin Douglas, and he, as usual, will not be filing any planned 13fs this quarter.  Who is Kevin Douglas?  Odds are you probably don’t know, yet over the past decade he has built one of the most impressive investment track records.  Recently he has received some headlines for his thus far poor investment in American Superconconductor Corp., but even those articles reference the fact that he is little known above any other point (see the Wall Street Journal on the topic).  If you do a Google Search for Kevin Douglas, it’s almost astonishing how little meaty information comes up for a guy who invests tens of millions at a time right now, in the age where Big Brother (aka the Internet) is always watching....MORE
We have a couple dozen posts on Westport, here are some of them.
From SEC Form4:

Common stock purchase or sale:
& Date
Company Symbol Insider
7:28 pm
KGD 2010 Annuity Trust V
MMD 2010 Annuity Trust V
(13(d)(3) group
10% owner)
143,000 $38.23 $5,466,890 1,016,846
7:46 pm
KGD 2010 Annuity Trust V
MMD 2010 Annuity Trust V
(13(d)(3) group
10% owner)
300,000 $36.92 $11,076,760 1,002,546
6:50 pm
KGD 2010 Annuity Trust V
MMD 2010 Annuity Trust V
(13(d)(3) group
10% owner)
200,000 $35.06 $7,012,000 972,546
7:12 pm
KGD 2010 Annuity Trust V
MMD 2010 Annuity Trust V
(13(d)(3) group
10% owner)
100,000 $36.91 $3,691,232 952,546
8:59 pm
KGD 2010 Annuity Trust V
MMD 2010 Annuity Trust V
(13(d)(3) group
10% owner)
500,000 $44.56 $22,278,276 887,146

"9 Scientists Get $3M Each In Billionaire Milner's Physics Prize"

Another from Eric Savitz at Forbes:
Nine scientists have received $3 million awards from the Fundamental Physics Prize Foundation, a new not-for-profit created by the billionaire investor Yuri Milner.

In an announcements this morning, the foundation said it is dedicated to ”advancing our knowledge of the universe at the deepest level by awarding annual prizes for scientific breakthroughs, as well as communicating the excitement of fundamental physics to the public.”

The awards dramatically exceed the financial payout from the Nobel Prizes, and in fact instantly become what Milner believes are the richest prizes in fundamental sciences....MORE

Will Suntech, Largest Solar Maker, Shares Get Wiped Out? Analyst Sets $0 Target (STP)

From Eric Savitz at Forbes:
 Are shares of the Chinese solar company Suntech headed for oblivion?

That would be a startling outcome for the company that is the world’s largest producer of solar panels, with 2011 revenues of $3.1 billion. But the stock continues to ratchet lower, and lower and lower. Aaron Chew, an analyst with Maxim Group, this morning cut his target price on the stock to zero – that’s nada, zilch, nothing – from 50 cents. He maintains his Sell rating on the company.

Today, the stock is down 29 cents, or 21.6%, to $1.05. The slide following Suntech’s announcement on Monday that it may have been the victim of a $690 million fraud related to an investment in a European company called Global Solar Fund. As my colleague Todd Woody noted yesterday, the fraud could hurt Suntech’s ability to pay or refinance $541 million convertible notes that come due in March 2013. In 2008, Suntech took at 80% stake in Global Solar, a company created to invest in solar energy projects. Suntech CEO Zhengrong Shi, took a 10% stake. The other 10% is held by GSF Capital, a company controlled by Javier Romero, who at one point was involved in the sale of the company’s products in Spain....MORE
Suntech May Have Been the Victim of a €560 million Scam (STP)

UPDATED--EIA Monthly Production Report Released July 31, 2012

From the Energy Information Administration:
The July Natural Gas Monthly, featuring data for May 2012, has been released. Total consumption of natural gas for May 2012, 1,850 Billion cubic feet (Bcf), set a new record for May. This is an increase of 11 percent over the previous May record set in 2011. Deliveries of natural gas to the electric power sector of 819 Bcf drove the trend, reflecting continued displacement of coal with natural gas. Dry production for May stayed relatively stable at 2,028 Bcf, or 65.4 Bcf per day.  
-Natural Gas Monthly

Summary of supply and disposition

Monthly Natural Gas Gross Production Report with data for May 2012
Released: July 31, 2012
Next Release: August 31, 2012

The two graphs below show total U.S. and Lower 48 natural gas production on one and the individual State production on the other.

U.S. and Lower 48 States Natural Gas Gross Withdrawals
Figure Data
State Natural Gas Gross Withdrawals
Figure Data
In May, Lower 48 States production remained essentially unchanged from April. Other States had the largest increase at 0.33 Bcf/d or 1.5 percent. This increment can be partially explained by new wells being brought online in the Marcellus shale play and gains in Colorado. Oklahoma also had a gain of 0.09 Bcf/d or 1.7 percent as new wells were brought online. Production declined in the Gulf of Mexico and Wyoming by 0.25 Bcf/d or 5.5 percent and 0.19 Bcf/d or 3.0 percent respectively, partially due to shut-ins for platform and plant maintenance.
Gross Withdrawals of Natural Gas1, May 2011 through May 2012

Quote du Jour: There's a Reason He's Chairman of Nestlé Edition

On making ethanol in a drought.
From the Washington Times:
Irrational infatuation with biofuels

“The only difference is that with the food market you need 2,500 calories per person per day, 
whereas in the energy market you need 50,000 calories per person.”
-Peter Brabeck-Letmathe, Chairman Nestlé S.A

HT: Big Picture Agriculture

AllianceBernstein: "Are Stocks Too Expensive Now?"

Be very careful with this type of relative value analysis.
From Institutional Investor:
Investors today have good reason to worry about stocks. Europe, the US and emerging markets are facing real problems today — and economic recoveries after financial crises almost always take longer than recoveries after ordinary downturns. The global economy may take several more years to fully recover from the credit crunch, and so may the stock market. Both could weaken again before getting better.

Indeed, our research has found that after 15 systemic banking crises around the world, the stock market took nine years on average to regain its prior peak. We don’t know if the recovery from the recent crisis will take a longer or shorter time than average, but assuming it is average, we’re now about halfway through.

But even taking these risks into account, we don’t agree with those who argue that the stock market is overvalued. To begin with, it doesn’t make sense to say the market is expensive, given where bond yields are today....MORE
I don't know of anyone who is using the "Fed Model" under the current interest rate regime.
Barron's June 9, 2012
The Flaws in the Fed Model 
There are perfectly reasonable arguments that can support an upbeat outlook on the stock market. Unfortunately for crafters and consumers of sound bites, one of the simplest and most popular bullish assertions is irrelevant.

This is the common, intuitive, yet specious claim that because yields on 10-year Treasury notes are near record lows at 1.64%, stocks are so flattered into appearing cheap by comparison that surely they must rise. The only way to watch an hour of financial television without hearing that one is to hit the mute button.
The idea here, once formalized as the "Fed Model," is that stocks' "earnings yield" (reported or forecast operating earnings for the S&P 500, divided by the index level) should tend to track the Treasury yield in some fashion. With this earnings yield now above 7%, based on a trailing price-to-earnings ratio near 13, this model and its various offshoots render equities a no-brainer buy. Or, if one prefers, that Treasuries are in a reason-defying bubble.

This simply doesn't hold up in theory or practice. The Fed Model only "worked" as a predictor of market action in the 1980s and '90s, when bond yields were steadily descending and stock values consistently rising as inflation and interest rates were slowly strangled. Both before that period and since, the Fed Model relationship has been mostly a non sequitur in terms of foretelling market performance....MORE

Case-Shiller: A House Price Index Primer

You probably saw the news this morning:

Case-Shiller Shows Strong Price Gains in May
Home prices put together a strong run this spring. The big question now: Can housing keep up the momentum heading into the summer?

The S&P/Case-Shiller home price index showed broad price gains across the country in May. After adjusting for seasonal factors, prices were up by 0.9%, the fourth straight monthly increase and the largest in nearly three years....MORE at Developments.
Here's what it means, again from the WSJ's Developments blog:
Are Home Prices Rising? A Price-Index Primer
Look for the S&P/Case-Shiller index to post a year-over-year decline of 1% when the latest results are released Tuesday, according to estimates from Zillow.

That would be the smallest decline in two years, when a short-lived run-up in home prices evaporated after federal home-buyer tax credits expired. Prices have been in negative territory ever since, as housing markets have struggled with a surfeit of homes and anemic demand.

But price declines are easing — and several other indexes are now reporting year-over-year gains — as the supply of homes for sale has fallen sharply. Those inventory declines, coupled with a modest uptick in demand, have helped stabilize home prices.

The Case-Shiller index, along with two others, from CoreLogic and the Federal Housing Finance Agency, use what’s known as a “repeat-sales model,” which means they look only at how prices have changed for the same home over time.

This provides a more accurate home-price level than median home price data, which instead can capture a shift in the mix of homes being sold in one month versus another month.
Case-Shiller and FHFA also provide a seasonally adjusted index, which smooths out month-over-month changes that are often distorted by seasonal factors. More homes generally sell in April than, say, January, so it shouldn’t be surprising to see prices rise as sales pick up.

While Case-Shiller still reports seasonally adjusted figures, it issued an advisory two years ago saying that the adjustments were less reliable given greater variations on housing activity since the housing downturn had deepened.

Here’s a look at what other home-price indexes measure, and what they’ve shown in recent months.

What the numbers show: S&P/Case-Shiller reported a 1.9% decline for April home prices from one year ago. Prices were up by 1.3% from March, though the increase was around 0.7% after adjusting for seasonal factors.

What the index measures: S&P/Case-Shiller covers just 20 of the nation’s largest metros. It is value weighted, meaning more expensive homes have a bigger impact on the home-price reading. New York and Los Angeles alone account for 35% of the composite-20 index, both because these cities are large and because home prices there are among the most expensive in the country, according to Jed Kolko, chief economist at real-estate website Trulia....MUCH MORE

Hurricane Watch: Invest 99L Slowly Organizing

From Wunderblog:
A tropical wave (Invest 99L) near 9°N 41°W, halfway between the Lesser Antilles Islands and the coast of Africa, has the potential to develop into a tropical depression later this week as it moves westward at 10 - 15 mph. Visible satellite loops show that the disturbance now has a moderate amount of poorly-organized heavy thunderstorms that continue to slowly increase in intensity and areal coverage. There is no surface circulation, but some counter-clockwise rotation of the large-scale cloud pattern is evident. Water vapor satellite loops show that 99L has a reasonably moist environment. The latest Saharan air layer analysis shows that the dry air from the Sahara lies to the north of 99L and is currently not affecting the storm. WInd shear over the disturbance is a light 5 - 10 knots, and ocean temperatures are 28°C, (82°F) which is well above the 26.5°C (80°F) threshold typically needed to allow formation of a tropical depression.

Figure 1. Morning satellite image of Invest 99L.

Forecast for 99L
Wind shear is expected to remain light through Friday, and ocean temperatures will remain near 28°C, according to the 8 am EDT run of the SHIPS model. However, a band of high wind shear of 20 - 40 knots associated with the subtropical jet stream lies just to the north of 99L, and it would not be a surprise to see 99L experience some higher shear conditions than are currently forecast. The farther north 99L gets, the higher the shear it will experience, and the SHIPS model is predicting shear in the moderate range, 10 - 20 knots, for Saturday - Sunday, as the storm works its way to 15°N. The disturbance is at 9°N, which is close enough to the Equator that the storm will have some difficultly getting spinning. Most of the models are showing some slow development of 99L. There are some major differences in the predicted forward speed of 99L, with the ECMWF and UKMET models predicting the storm will reach the Lesser Antilles on Friday, and the GFS predicting a later arrival, on Saturday. At 8 am Tuesday, NHC gave 99L a 20% chance of developing into a tropical depression by Thursday morning. I expect the storm will begin having trouble with tendrils of dry air reaching down from the north at times this week, but give 99L a 50% chance of eventually developing into Tropical Storm Ernesto sometime in the next ten days. Residents and visitors to the Lesser Antilles Islands should anticipate heavy rains and strong winds from 99L beginning to affect the islands as early as Friday morning. The long-range fate of 99L next week is uncertain. A track west to west-northwest through the Caribbean, or to the northwest towards the U.S. East Coast are both possible. The storm is less likely to survive if it heads northwest towards the U.S....MORE

Bill Gross' PIMCO Monthly Outlook August 2012

Cult Figures
  • ​ The long-term history of inflation adjusted returns from stocks shows a persistent but recently fading 6.6% real return since 1912. 
  • The legitimate question that market analysts, government forecasters and pension consultants should answer is how that return can be duplicated in the future.
  • Unfair though it may be, an investor should continue to expect an attempted inflationary solution in almost all developed economies over the next few years and even decades.
​ The cult of equity is dying. Like a once bright green aspen turning to subtle shades of yellow then red in the Colorado fall, investors’ impressions of “stocks for the long run” or any run have mellowed as well. I “tweeted” last month that the souring attitude might be a generational thing: “Boomers can’t take risk. Gen X and Y believe in Facebook but not its stock. Gen Z has no money.” True enough, but my tweetering 95-character message still didn’t answer the question as to where the love or the aspen-like green went, and why it seemed to disappear so quickly. Several generations were weaned and in fact grew wealthier believing that pieces of paper representing “shares” of future profits were something more than a conditional IOU that came with risk. Hadn’t history confirmed it? Jeremy Siegel’s rather ill-timed book affirming the equity cult, published in the late 1990s, allowed for brief cyclical bear markets, but showered scorn on any heretic willing to question the inevitability of a decade-long period of upside stock market performance compared to the alternatives. Now in 2012, however, an investor can periodically compare the return of stocks for the past 10, 20 and 30 years, and find that long-term Treasury bonds have been the higher returning and obviously “safer” investment than a diversified portfolio of equities. In turn it would show that higher risk is usually, but not always, rewarded with excess return.

Got Stocks?
Chart 1 displays a rather different storyline, one which overwhelmingly favors stocks over a century’s time – truly the long run. This long-term history of inflation adjusted returns from stocks shows a persistent but recently fading 6.6% real return (known as the Siegel constant) since 1912 that Generations X and Y perhaps should study more closely. Had they been alive in 1912 and lived to the ripe old age of 100, they would have turned what on the graph appears to be a $1 investment into more than $500 (inflation adjusted) over the interim. No wonder today’s Boomers became Siegel disciples. Letting money do the hard work instead of working hard for the money was an historical inevitability it seemed.
Yet the 6.6% real return belied a commonsensical flaw much like that of a chain letter or yes – a Ponzi scheme. If wealth or real GDP was only being created at an annual rate of 3.5% over the same period of time, then somehow stockholders must be skimming 3% off the top each and every year. If an economy’s GDP could only provide 3.5% more goods and services per year, then how could one segment (stockholders) so consistently profit at the expense of the others (lenders, laborers and government)? The commonsensical “illogic” of such an arrangement when carried forward another century to 2112 seems obvious as well. If stocks continue to appreciate at a 3% higher rate than the economy itself, then stockholders will command not only a disproportionate share of wealth but nearly all of the money in the world! Owners of “shares” using the rather simple “rule of 72” would double their advantage every 24 years and in another century’s time would have 16 times as much as the sceptics who decided to skip class and play hooky from the stock market....MORE

Monday, July 30, 2012

Our Favorite Astrologer is Predicting a Market Crash

There are really only two go-to astro-technicians and one of them is incomprehensible.
Here's the other, from Money Morning:
Planets Align for Stock Market Crash in 2013 ­− If Not Sooner
Of all the tools one might use to predict a stock market crash in 2013, planetary alignments and solar particles are not, for most people, the first options that spring to mind.

But market analyst Arch Crawford has applied his arcane "astro indicators" for 35 years with surprising success.

You see, Crawford has forecast market crashes before. His astro indicators helped him predict the stock market crash of 1987, as well as the crash following the 9/11 attacks and the crash of 2008.

Now Crawford is speaking up as something just hit his radar again.

One of Crawford's most reliable indicators crossed a threshold on July 18. That means he sees another major stock market crash hitting at some point between now and March 2013.

"Between 18th of July and the end of February [2013], I believe the markets worldwide will crash," Crawford told GoldSeek Radio last week. "And that's because that if any one of them falls, it's going to take a bunch of others into a black hole." 
The Weird Science of Arch Crawford 
It's easy to write off Crawford and his unusual methodology, but he doesn't use his astro indicators exclusively; he's also an accomplished technical analyst.

He worked as a technical analyst early in his career at Merrill Lynch, which is when he noticed a correlation between some astrological models he'd been studying and his technical charts.

Eventually Crawford evolved a method for predicting market behavior based on both technical analysis and astro indicators. The more they agree, the more confident he is in his predictions.

Hulbert Financial Digestranked hisCrawford Perspectivesthe best stock markettimer for the period between Oct. 1, 2007 and Oct. 31, 2009. Timer Digest has placed him first in 1987, 1994 and 2008, and second in 2002.

Today, as Crawford looks at his array of indicators, many point to a 2013 stock market crash, although it could happen before then.
Just looking at the stock charts, Crawford said he sees "long-term cycles beginning to kick in to the down side."...MORE
Compare with:
Short-Term Geocosmics
Mercury continues retrograde through August 8 as discussed at length in last week’s column. But for this coming week there are a slew of soft, harmonious aspects which are usually favorable in this type of market climate. However, there is also a full moon (Leo Sun, Aquarius Moon) August 2, and that can disrupt the evenness of this current rally.

Our sights are set more on the following two weeks, especially August 10-20 when Mars will conjunct Saturn (the astrological peak of the drought) in a point that is critical to the chart of the New York Stock Exchange (founded May 17, 1792). Mars will be at 22-27 degrees of Libra then. In the NYSE chart, Jupiter and Neptune are at 22-27 of Libra, and Saturn is in opposition at 26 degrees of Aries. This could be explosive, both in a mundane sense (for it pertains to military conflict and vehement disagreements) and financial markets. At its best, it is a time that can be favorable for organizing one’s life and getting a lot accomplished, if you are focused....
See also:
"Fake Astrology-Based Hedge Fund Threatens To Ruin Things For All The Legit Astrology-Based Hedge Funds Out There "

J.P. Morgan's astrologer was  Evangeline Adams.

Flowserve Appears Quite Pleased With Their Earnings (FLS)

Earlier today we had mentioned the company for the first time ever: "U.S. Oil Surge Causing Shortages of Valves, Pumps (SPW; FLS; MRC)".
The stock closed the regular session down 31 cents at $115.80. After-hours the stock is up 7 cents.
Here's the press release via MarketWatch:
Second Quarter EPS Rises 12.5% to $1.98 and Bookings Reach $1.21 Billion; Company Reaffirms 2012 Full Year EPS Target Range of $8.00 to $8.80

DALLAS, July 30, 2012 - Flowserve Corp. FLS -0.27% , a leading provider of flow control products and services for the global infrastructure markets, announced today financial results for the second quarter of 2012 in its Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission. Highlights from the second quarter and first half of 2012 were as follows:
Second Quarter 2012 (all comparisons versus second quarter 2011 unless otherwise noted):
- Fully diluted EPS of $1.98, up 12.5%, including $0.11 of below the line negative currency effects and a $0.05 net benefit from discrete corporate items
- Fully diluted EPS up 24% excluding below the line currency effects year over year 

"Natgas And Corn ETFs Explode As Market Eases" (UNG; CORN)

We don't have a lot of interest in UNG (the tracking errors) but the futures are up 6.37% at 3.207. This is within three or four cents of a short term top.
Dec. Corn futures were up 2.62% at $8.14 while September settled at $8.20 which I believe is an all-time record.
From Investors Business Daily:
Natural gas ETFs exploded higher and corn popped to a record while the market pulled back Monday after staging the biggest two-day rally of the year.
United States Natural Gas (UNG) — the largest ETF tracking the commodity — popped 6.11% to a 22.01, a five-month high.

UNG has exploded 53% from an all-time low in April. Meanwhile, natgas futures shot up 57% from a 10-year low in mid-April to more than $3 per billion cubic feet, or bcf, this week. Producers have cut back production in response to low prices, while demand from power plants increased to meet air-conditioning needs during the summer heat wave. Temperatures in the lower 48 states averaged 3 degrees higher than the 30-year average and 0.9 degrees warmer than the year-ago period.

"Extreme heat and relatively low natural gas prices have pushed gas for power generation to historically high levels this summer," the U.S. Energy Information Administration said in a weekly natural gas report. Power burn for the week ending July 25 averaged 34.9 billion cubic feet per day, 2.3% higher than that prior week and nearly 2% greater than the year-ago period. Baker Hughes natgas rig count decreased by four to 518.
Should the U.S. experience a cold winter after producers decreased production, supplies could evaporate at a record rate, says Shawn Hackett, founder of Hackett Financial Advisors in Boynton Beach, Fla. Natgas prices would have to rise back to $4 to $6 per bcf to entice producers to ramp up production again, he says.
U.S. natgas supplies currently are 18% above last year's levels and 16% above the five-year average, according to the EIA....

...Teucrium Corn (CORN) heated up 2.15% Monday to an all-time high of 51.15 as crops shrivel from the worst drought in 50-years. Futures jumped another 3% to a record high of $8.17 per bushel on the Chicago Board of Trade....MORE

Crop Progress Report July 30, 2012--48% of Corn Crop "Poor or Very Poor"

That's up from 45% last week.
From the USDA 13 page PDF

U.S. Oil Surge Causing Shortages of Valves, Pumps (SPW; FLS; MRC)

SPW is the symbol for the parent of one of the valve makers, MRC, one of the pump distributors, came public in April, FLS does it all.
From Reuters:

The U.S. shale oil revolution can't be stopped, but it could be delayed by a potential shortfall of 10-ton valves and giant pipeline pumps essential for rebalancing markets upended by the surge in production.

Amid an unanticipated boom in inland oil output that turned the domestic market upside down last year, firms from Enterprise Products Partners to Shell Pipeline and Plains All American have launched a $20 billion bonanza to build, expand or reverse two dozen pipelines in the past year.

But as they help effectively to switch the flow of oil from the north to southern refineries and relieve the glut of cut-price, landlocked crude, concerns are growing that the firms that make key pipeline components may be straining to keep pace.

"The supply chain hasn't quite caught up," said Terry McGill, president of Enbridge Energy Co Inc, the U.S. division of Canadian pipeline giant Enbridge Inc, which has some $4 billion worth of U.S. projects on the books....MUCH MORE

HT: Gongloff

Shell would Like to Export One Quarter of Canada's Natural Gas to Asia (RDS)

Thinking big.
From the Globe and Mail:

Shell applies for 25-year natural gas export licence
Royal Dutch Shell plc and its three Asian partners have applied to export an enormous volume of natural gas from the British Columbia coast, as global attention begins to focus on the movement of Canadian energy to Japan, China and other markets.

On Friday, Shell said it had applied to the National Energy Board for a licence to export up to 24-million tonnes per year of natural gas. That is equivalent to 3.4-billion cubic feet per day, fully a quarter of Canada’s entire output in 2011.

Shell, which has partnered with Korea Gas Corp., Mitsubishi Corp. and PetroChina on an export terminal slated for Kitimat, B.C., is asking for approval to export gas for 25 years....MORE

Crestmont Research: How Much Longer Can the Secular Bear Last?

Our best guess is 2-3 years but some smart people are saying the next secular bull won't begin until 2020.
Until then take a page from Gerald M. Loeb and trade, don't invest. Keep a tight stop-loss discipline and don't push the river (it flows by itseld).
From ZeroHedge:
The secular bear market that the US has been caught in for a better part of the last decade will end. Eventually. The only question is when. Last week we reported that the bulk of market gains year to date, has been driven exclusively by PE multiple expansion, which is to be expected:

EPS forecasts for the end of 2012 are now the lowest they have been since the beginning of the year. Yet while such sharp, sudden and short and bear-market rallies, exclusively on the back of the global central banks, are to be expected, the bigger question is how much more of a secular decline in PE multiples is to be expected before the bear market ends and a new bull market can begin.

As the following chart from Crestmont Research shows there is quite a bit more to go, even with Fed assistance (or rather, because of it, and its forced rejection of reaching a fair clearing price sooner rather than later), before the bear market is officially over. Just over 50% more. To the downside.

How the Bear Market declines have looked in perspective, and where we ultimately have to go before all the artifical supports are cleared out: 

And the Bull Markets preceding them...
h/t Things That Make you go Hmmm

"On Incentives, Agency and Aqueducts"

An oldie-but-goodie from the Psy-Fi blog:
Risk Management, Roman Style
There’s an aqueduct in Segovia, in Spain, that’s stood the test of time. A lot of water has flowed over that bridge … two thousand years worth, more or less, since it was built by the Roman Empire. Back then risk management consisted of getting the chief engineer to stand underneath the structure when they removed the supports: now that’s a proper incentive.

Incentives stand at the heart of a lot of human behaviour in corporations but financial theorists have had a great deal of difficulty in understanding that an incentive is not necessarily the same as a financial reward. Although the ideas of psychologists and sociologists are slowly seeping through there’s still a long way to go before there’s a proper appreciation of what motivates people. In the meantime we’re stuck with Agency Theory, the sheer power of grim self-interest: it’s like real life but not as we know it. 

Agency in Hammurabi
In fact the idea of making builders stand beneath their constructions when first erected goes back a lot further than the Romans, it can be found in the Code of Hammurabi, from Babylonian times, where the punishment for building a house that fell down was death. To be fair, most crimes in Babylonian times were punishable by death largely, it seems, because of a lack of imagination when it came to various punishments. Forcing offenders to learn about Agency Theory would have been one alternative.

The idea is that there are two parties involved in forming an employment contract (actually any sort of contract, but let’s talk specifics here) – a principle (the employer) and the agent (the employee). Supposedly these two parties have different objectives: roughly, the employer wants to grind the employee into the ground at minimal cost and the employee wants to shirk about while earning as much as possible. It’s the normal economic view of human nature: miserly and miserable....MORE

"Wal-Mart Surges as Economy Sputters" (WMT)

Here at Boring Advisors we believe...

We have pretty much one stock we've been touting to the public and it is boring.
$74.91 up 39 cents.
From BusinessWeek:
Remember that old bit about watching out for falling prices?

Well, shares of Wal-Mart Stores (WMT) hit an all-time high of $74.80 on July 27, having recently pierced levels they haven’t visited since 1999. The stock’s 25 percent year-to-date return is nearly triple that of the Standard & Poor’s 500 index. Over the past 13 years, the chain that put Bentonville, Ark., on the map went from earning $4.4 billion on $137 billion in revenue to now clearing $16 billion on sales of $446 billion.

Unemployment has since more than doubled from its New Economy-charged days of 4 percent....MORE
It migh be time to go with a whole new marketing campaign.
I kinda like this approach:

Natural Gas Hurricane Watch: Invest area 99L forms in tropical Atlantic as conditions become more favorable

Probably no development from this invest but they should start coming every 4-5 days as the dust from the Saharan Air Layer diminishes.
From Hurricane Track:
The NHC is monitoring an area of low pressure well to the south and west of the Cape Verde Islands for possible development. It appears that conditions across the region are becoming more conducive for tropical cyclone formation. The dry, dusty air seen in recent weeks has significantly decreased and water temps are just warm enough to support development.

Looking at some of the parameters typically associated with tropical cyclone formation, we see that vertical wind shear, the difference in wind speed and direction with height in the atmosphere, is right where it should be for this time of year. In other words, shear is not a factor. It is running at about the climatological average. This should allow for a steady growth in deep tropical thunderstorms or convection. In turn, this will allow the pressures to continue to fall as the fairly large envelope of energy gradually consolidates as it moves westward....MORE
This is what I was thinking about in last week's "What Could Break the Drought? A Hurricane Would Be Nice (88% of Corn Areas in Drought)":
...Ike was one of those long-haul storms that come off the coast of Africa and there's still too much dust and sand for any development for the next few weeks. Better odds on a Gulf of Mexico formation but still, long odds.

Managed Funds Pile Into Corn

Time for some rain.
From Marginal Evolution:
...Following the reports on drought, long positions on corn have skyrocketed during the month of July to 210,401 bullish bets from a short position on the month before. Open interest on corn have gone up nearly 90,500 bets (crowded trade?).

Bets on wheat have also turned bullish after months of short positioning, as has sugar and lean hogs....MORE

Major Forecaster Cuts Corn Estimates

From Agrimoney:

Grain prices bounce on lowball Lanworth yield data
Grain and oilseed prices revived as Lanworth lowered the bar further on US corn yield forecast, putting it on course for a 17-year low, and hopes faded for crop-stabilising rains in the drought-hit Midwest.
Corn for August delivery jumped back above $8.00 a bushel at one point, with wheat retaking the $9-a-bushel mark and soybeans gaining nearly 3%, as already-poor expectations for the US corn crop took a further knock.
 Lanworth - whose forecasts, which employ advanced analysis satellite imagery, are closely watched by traders – slashed its estimate for the US corn yield to 122.0 bushels per acre, from an estimate last month of 136.8-157.4 bushels per acre.
The forecast would represent the weakest result since 1995, and is lower than estimates from many other analysts, although a crop  tour by broker Doane pegged the yield in Iowa at 117 bushels per acre....MORE

An algorithm for predicting whether your tweet will go viral

From UCLA Today:
Reporters, bloggers and other media trying to boost their Twitter presence can learn a few tips from an unexpected discipline: electrical engineering.
Roja Bandari, a Ph.D. candidate in electrical engineering at UCLA, developed an algorithm that predicts with 84 percent accuracy whether a news article will be popular on Twitter or bomb on the social media site.
Bandari came up with the algorithm with two Hewlett Packard Lab researchers while she was working at HP as an intern. She shared the paper in June at the 2012 International Association for the Advancement of Artificial Intelligence Conference on Weblogs and Social Media.
Using artificial intelligence methods, the trio examined millions of tweets linking to more than 40,000 news articles. More than four-fifths of the time, if the algorithm flags the article as “popular,” more than 100 tweets will later link to it. A “medium tweet” article will still see a healthy 20-100 tweets, while unpopular articles can expect less than 20....MORE

Suntech May Have Been the Victim of a €560 million Scam (STP)

From PV Tech:
Suntech claims to be victim of massive fraud over GSF investment
Suntech Power Holdings said it had started multiple legal proceedings against a number of unidentified parties regarding investment guarantees it provided for a joint venture PV power plant project developer, Global Solar Fund, S.C.A., Sicar (GSF). However, Suntech has claimed that a pledge of €560 million of German government bonds by a third-party investor of GSF, GSF Capital Pte Ltd., may never have existed. Suntech said that it may have to delay second quarter financial reporting as a result.

According to Suntech, recent efforts to "monetize" its investment in GSF led to the discovery that the "collateral related to the security interest may not have existed and the company may have been a victim of fraud."

Dr. Zhengrong Shi, Suntech's chairman and CEO said, "We are very disappointed that this has occurred and it has the highest level of attention from the company and the board, including the audit committee. There is no indication that management had any involvement and we are vigorously pursuing all avenues to resolve this matter and ensure that we protect the interests of our shareholders."...MORE

Shanghai Composite Index Sets Another New Low

With this morning's .89% decline we're now back to April 2009 on the Composite.
Here's the two year chart:
Chart for上證綜合指數 (000001.SS)

 June 23 
Is China's Shanghai Index Approaching the Waterfall Decline?
June 28 
Shanghai Stock Exchange Index Continues Decline, Now Down for 2012
July 9 
"Shanghai Composite Breaks Another Support"

Two Wildly Disparate Sources: Commodity Boom Over

Following up on the iron ore story immediately below. First up, Financial Sense:
The world’s economy is passing through a low growth environment and this is in stark contrast to the first half of the last decade, when we had a global boom. Today, Europe is on the brink of recession, the US economy is growing at only 2% per year and it appears as though China is facing a major slowdown. Given these circumstances, we are of the view that the prices of natural resources will struggle to retain last decade’s momentum.

Figure 1 shows that over the past decade, commodity prices grew at an annualised rate of approximately 9%, but 200 years of history suggests that this frantic growth rate is likely to moderate. According to Barry Bannister at Stifel Nicolaus, commodity prices are likely to increase by only 2-3% per year over the next decade (Figure 1).
Figure 1: Rolling 10-year Commodity Price Growth
commodity growth 1805 to 2012Source: Barry Bannister, Stifel Nicolaus

If Barry’s estimate is on the mark, the Reuters-CRB (CCI) Index will only appreciate by approximately 35% over the next decade; a far cry from its recent gains. However, if historical patterns play out, in about 10 years from now, commodities will embark on another multi-year secular bull market, which will cause prices to triple (Figure 4)....MORE
And from The Economist:
Commodity prices
Downhill cycling
A peak may be in sight for commodity prices
ASSIGNING analysts to cover the humdrum world of commodities and mining was once investment banking’s punishment for low-flyers or copybookblotters. Then China’s pulsating economy and appetite for raw materials sent the prices of industrial metals and bulk commodities soaring. It turned watching the dismal world of copper, zinc and nickel, and the mining firms that dug them up, from a role tantamount to constructive dismissal to glamour.

Can it last? Signs that China’s economy is coming off the boil—recent figures put annual growth in the second quarter at a mere 7.6% compared with the double-digit rates of the past few years—have led some to suggest the commodity boom is over and prices are likely to crumble. That prognosis looks premature.
The past decade has been a remarkable one for metals and bulk commodities—iron ore and coal. Consumers, desperate to get their hands on raw materials, paid well over the cost of production as demand outstripped supply, which was constrained by years of underinvestment by mining firms. Many analysts talked of a “supercycle”, a long-term surge in prices lasting for decades on the back of Chinese demand.
Chinese urbanisation has been the fundamental force behind that demand. Until the start of the millenium China, the world’s biggest producer of many commodities, was largely self-sufficient or even a modest exporter. Economic reforms have turned it into a manufacturing and exporting behemoth, and have prompted a vast movement of people away from the countryside to the cavernous factories and sprawling megacities of the new China. The housing, roads, railways and infrastructure supporting this shift required massive imports of minerals.

China’s steel production grew by 16% a year between 2000 and 2011. Around half the world’s steelmaking raw materials and two-fifths of its copper and aluminium now disappear down the dragon’s maw. The price of copper, which had fallen by 0.8% a year in the 1980s and 1990s to reach little more than $1,300 a tonne a decade ago, exceeded $10,000 a tonne in early 2011 and still stands at around $7,500.

A slowdown in China has led people to wonder whether the supercycle is over. The evidence suggests that it has reached a peak. Academics probing supercycles over the past 150 years reckon that the expansionary phase lasts between 15 and 20 years. Most analysts put the start of the most recent cycle around 2000 (see chart 1). HSBC, which thinks this cycle is just seven years old, concedes it faces the onset of “creaking middle age” and that a long senescence might follow. Ruchir Sharma of Morgan Stanley sees in a 200-year history of commodity prices a repeated trend of two decades of price declines followed by one decade of gains....MORE

Short Australia: Iron ore going down, down, down (VALE; BHP; RIO)

Ten days ago China Daily was reporting: "Iron ore inventories in China reached a record high of about 100 million metric tons due to shrinking downstream demand, but major global suppliers are still increasing output." Last week the world's largest iron miner reported: "Vale Counting on China Rebound as Profit Sinks"
And today, FT Alphaville:
We related last week a forecast from Nomura that iron ore was going to keep falling, and probably more steeply, as it tends to follow Shanghai rebar futures (the most-traded steel futures) and those have plummeted of late. It looks like spot iron ore prices are indeed catching up (or down) with rebar, and that’s taken iron ore below the critical $120/tonne mark.

Why is $120 important? Because of the cost curve. This comes up a lot in the world of iron ore, so it might be worth revisiting what that means.

The “cost  curve” just refers to the price level at which each producer can and will continue to produce. Above their price level they’ll profit and below it, they’ll tend to cut or stop producing. Of course this is a very broad generalisation and lots of things can get in the way but that’s believed to be the general structure of the market today....MUCH MORE
The Australia ref. was to the Pilbara region where Rio Tinto and BHP Billiton are extracting 430 million tonnes a year.

Sunday, July 29, 2012

"Mario Draghi has promised the moon. The European Central Bank’s council had better deliver on his pledge this week"

Yeah, a failure to deliver would be very, very bad.
From Ambrose Evans-Pritchard at the Telegraph:

Only Mario Draghi's ECB can avert global calamity before the year is out

Mario Draghi has promised the moon. The European Central Bank’s council had better deliver on his pledge this week. If it does not, the crisis will surely escalate out of control in August or soon after. 
We are beyond the point where a quarter point rate cut will achieve anything. Nor will it help to launch a fresh round of "temporary and limited" bond purchases - to use the self-defeating language that Mr Draghi is forced to utter.
The only issue that matters at this late stage is whether Germany is willing to let the ECB step up to its responsibility as a global central bank after two years of ideological posturing and take all risk of sovereign default in Spain and Italy off the table - which it can do easily enough once it stops playing politics and obeys the “financial stability” clause (Article 127) of the Lisbon Treaty.
That is to say, whether Latin states are willing to mobilize their majority power on the ECB’s council to force a change in policy over German protest, or lamely let themselves be picked off one by one in serial disasters like the death of the Gold Standard in 1931.
Failure to halt a full-blown debt debacle in Spain and Italy at this delicate juncture - with China, India and Brazil by now in the grip of a broken credit cycle and the US on the cusp of fresh recession even before the “fiscal cliff” hits - would tip the entire global system into a downward spin, triggering the sort of feedback loop that caused such havoc in late 2008.

As the International Monetary Fund warns in its Article IV report, “the euro area crisis has reached a new and critical stage … raising questions about the viability of the monetary union itself. The adverse links between sovereigns, banks, and the real economy are stronger than ever.” ...MORE

How the Elites Built America’s Economic Wall

From Bloomberg:
For a century, incomes became increasingly equal across the U.S., as poor states such as Alabama caught up to rich places like California.

Economists have long taught this history to their undergraduates as an illustration of the growth theory for which Robert Solow won his Nobel Prize in economics: Poor places are short on the capital that would make local labor more productive. Investors move capital to those poor places, hoping to capture some of the increased productivity as higher returns. Productivity gradually equalizes across the country, and wages follow. When capital can move freely, the poorer a place is to start with, the faster it grows.

“That’s one of the central relationships in macroeconomics,” says Daniel Shoag, an economist at Harvard University’s Kennedy School of Government. “It’s an extremely strong one, and we teach it in introductory macro because it’s one of the few macro facts that are predicted by a model that isn’t a tautology and that holds extremely well.”

Or at least it used to. Over the past 30 years, the convergence has largely stopped. Incomes in the poorer states are no longer catching up to incomes in rich states.

Mobile Labor
In a new working paper, Shoag and Peter Ganong, a doctoral student in economics at Harvard, offer an explanation: The key to convergence was never just mobile capital. It was also mobile labor. But the promise of a better life that once drew people of all backgrounds to rich places such as New York and California now applies only to an educated elite -- because rich places have made housing prohibitively expensive. (Shoag and Ganong visualized these changes in a series of excellent animated graphics.)

The states with the highest incomes also used to have the fastest-growing populations, as Americans moved to the places where they could earn the most money. Over time, that movement narrowed geographic income differences. In 1940, per-capita income in Connecticut was more than four times that in Mississippi. By 1980, Connecticut was still much richer, but the difference was only 76 percent. In the two decades after World War II, Shoag and Ganong find, migration explains about a third of the convergence of average incomes across states....MORE

The Social Media Bubble: Who Won? (FB; P; GRPN; ZNGA)

From Reuters:

Social media companies, once hailed by their Silicon Valley boosters as world-changing businesses with limitless potential, are instead proving a sobering reminder of how investors can be seduced by Internet hype.
With a few exceptions, the first wave of social media firms to trade on the public markets has delivered a disastrous performance that conjures memories of the dot-com bust of 2000.

"Farmville" publisher Zynga, which went public in December at a valuation of $7 billion, is trading around $3.15 a share, more than 68 percent off its $10 IPO price.

Daily deals site Groupon, touted as the firm that could reinvent local commerce, has fallen from its $20 IPO price to about $7.15 in nearly nine months. Music service Pandora Media has dropped from $16 at its June 2011 IPO to around $10 on Friday.

And on Thursday, the 800-pound gorilla of the group, Facebook Inc, reported tepid results that shaved some $10 billion off the company's market cap. The stock has gone straight down since its botched May initial public offering and now trades over a third below its $38 IPO price.

"The VCs, the private equity guys at the early stages, already cashed out and made their fortunes," said Peter Schiff, chief executive of Euro Pacific Capital. "Everybody else who ran to buy the stock at the IPO at a sky-high valuation ended up holding the bag."

"A lot of these companies are going to make a quick buck and flame out," he added. "Just look at 10 years ago."

If an investor had sunk $1,000 into any of the four erstwhile dotcom darlings, he would have anywhere from $317.50 to $706.45 left over. That same wad of cash in LinkedIn would have more than doubled, to about $2,200.

But many VC firms -- such as early Facebook backer Accel Partners -- made a killing on the IPOs by getting in the door first. Early backers in Pandora, for instance, may have picked up shares in the firm for as little as around 50 cents apiece....MORE

"Game Theory and Crowded Trades"

From Prudent Bear (July 13):
It was, to say the least, another interesting week.  JP Morgan restated its first quarter earnings, as the company’s “London Whale” synthetic derivative loss jumped to $5.8bn.  Another city in California can’t pay its bills and readies for bankruptcy.  China reported second quarter growth at 7.6%, a three-year low, while articles abound questioning the veracity of Chinese data.  Moody’s downgraded Italy’s sovereign debt rating two notches to not much better than junk.  Apparently, Silvio Berlesconi is preparing for another run at the Italian presidency, as the competent Mario Monti states he’s not interested. Spain’s fledgling President Rajoy announced yet another austerity plan, this time hoping to trim a (stubbornly) huge budget deficit by $80bn.  

From my perspective, the most meaningful of this week’s data was Friday’s report from the ECB showing that Spanish bank borrowings had reached a record 337bn euro ($411bn), up almost 50bn euros ($61bn) during June.  Spanish institutions have now increased ECB borrowings by 204bn euro ($250bn) in only five months.  There’s no mystery surrounding President Rajoy’s snappy acquiescence to EU demands for additional painful deficit-cutting measures.  Spain’s banking system is suffering a run on deposits and liquidity.  The euro traded to two-year lows Friday morning, before rallying somewhat to close out another losing week.  

From Friday’s WSJ Heard on the Street column (Simon Nixon):  “Feeling more relaxed about the euro crisis since last month's summit? Think again. The risk of a euro-zone breakup may actually be rising rather than falling, according to Bank of America Merrill Lynch strategists David Woo and Athanasios Vamvakidis. Using game theory to consider how the situation might evolve, they believe the crisis will boil down to a game of bluff between Italy and Germany in which neither country has an incentive to back down.  That doesn't mean this would be the best outcome for either side; in game theory, the most likely outcome isn't always what economists call ‘Pareto optimal,’ one that will bring maximum benefit to all players. Instead, the ‘Nash equilibrium’ for the euro zone—the situation in which no player has an incentive to change strategy because to do so unilaterally would leave them worse off—is that Italy refuses to undertake the overhauls needed to enable its economy to grow and Germany refuses to provide the bailouts to persuade it to stay.”

From Wikipedia:  “It is commonly accepted that outcomes that are not Pareto efficient are to be avoided, and therefore Pareto efficiency is an important criterion for evaluating economic systems and public policies. If economic allocation in any system is not Pareto efficient, there is potential for a Pareto improvement—an increase in Pareto efficiency: through reallocation, improvements can be made to at least one participant's well-being without reducing any other participant's well-being.  …In practice, ensuring that nobody is disadvantaged by a change aimed at achieving Pareto efficiency may require compensation of one or more parties. For instance, if a change in economic policy eliminates a monopoly and that market subsequently becomes competitive and more efficient, the monopolist will be made worse off…  This means the monopolist can be compensated for its loss while still leaving a net gain for others in the economy, a Pareto improvement. In real-world practice, such compensations have unintended consequences. They can lead to incentive distortions over time as agents anticipate such compensations and change their actions accordingly.”....MORE

Friday, July 27, 2012

"Annals of dubious statistics, crowdfunding edition"

From Felix Salmon at Reuters:
Are crowdfunding statistics the new counterfeiting statistics? Certainly they seem to have become a meme. If you know that crowdfunding is a big deal, it’s probably because you read all about it in TechCrunch, in May (“these portals raised $1.5 billion and successfully funded more than 1 million campaigns in 2011″), USA Today, a few weeks later (“About $1.5 billion was raised in 2011 by about 450 crowd-sourcing Internet sites worldwide”), or maybe the Economist, a week after that (“$2.8 billion will be raised worldwide this year, up from $1.5 billion in 2011″). More recently, Forbes upped the ante even further: “This year alone, an estimated $3.2 billion dollars is expected to be raised through donation-based crowdfunding platforms like Kickstarter”.

All of these statistics, you won’t be surprised to hear, come from the same place: a May report from Crowdfunding.org and its research arm, Massolution. The report lists — by placing their logos on five successive pages of the report, so that their names can’t be searched — 135 different “participating companies”, starting with Lending Club and Kiva, and ending with… um, hang on a sec. Lending Club and Kiva? Since when are they “crowdfunding platforms”?

It turns out, if you look at the definition of a “crowdfunding platform” that the report uses, it’s incredibly broad: “an operator of a funding platform that facilitates monetary exchange between funders and fundraisers.” Which turns out to include not only peer-to-peer lenders but also FirstGiving, a website which non-profits use to accept donations, and which claims to have moved $1 billion of funds through its system. For that matter, the definition doesn’t even say that the crowdfunding platform needs to be online: I reckon that if anybody hosting a political fundraiser probably counts as a crowdfunding platform under this definition. Hell, the New York Stock Exchange would even qualify....MORE

"The Euro Is About to be Stopped" (EUR/USD)

EUR currently 1.2308
The bet is the Fed does QE3 but the ECB prints even more.
From Slope of Hope:


Natural Gas Rig Count DOWN 13 to 505

We'll have more on the interplay between the count, completions and decline curves next week.
From Reuters:

*Gas-directed rig count falls to lowest since July 1999
* Horizontal rig count drops for third straight week

The number of rigs drilling for natural gas in the United States dropped this week to the lowest level in 13 years as producers continued to slow dry gas drilling operations and focus instead on more profitable oil and gas liquids wells.

The gas-directed rig count posted its ninth drop in the last 10 weeks, sliding by 13 this week to 505, the lowest since late July 1999 when there were 498 rigs operating, data from oil services firm Baker Hughes showed on Friday.

The gas rig count is down 46 percent since peaking last year at 936 in October. The nine-month-long drop has fed expectations that producers were getting serious about stemming the flood of record gas supplies.
Baker Hughes earlier this month said it expects the U.S. natural gas rig count to stand at 488 by the end of this year, down 321 from 2011 levels....MORE

Former Rio Tinto VP: "China fears unfounded because it's a 'dud investor' "

From The Australian:
FORMER Rio Tinto executive Michael Komesaroff believes the debate over Chinese investment in Australia -- which reignited this week when Tony Abbott flagged tighter conditions for Beijing's state-owned companies -- has ignored one key point: the communist giant is a dud investor. 
"You tell me one successful mineral resource project they've got anywhere in the world," says Komesaroff, who has worked for the Chinese government in Beijing and is now a consultant to some of the world's biggest mining companies.

"How I define success: was the project delivered on budget and on time, and was the China brand damaged? I can't think of any."

While Australia has been tying itself up in knots over the rising level of investment by China's state-owned enterprises, the results of Beijing's spending on the ground have been dismal and its policymakers are growing increasingly anxious about the poor returns.

State-owned miners, says Komesaroff, have wasted billions of dollars on ill-conceived ventures in Australia and elsewhere, because they have mistakenly attempted to copy their methods at home in a foreign setting.

China, of course, is a very different place from Australia, where truck drivers in the mining industry earn $150,000 a year, unions complain about work conditions, environmental approvals are a headache and governments change policies on a whim....MORE
As best as I can tell Mr. K. was Prez of Rio Tinto Japan and VP Strategy for the aluminum biz.

"What Happened to Companies Connected to Geithner after News Leaked He was to be Appointed Treasury Secretary? "

From MIT via the HBS:

The Value of Political Connections in the United States

The announcement of Timothy Geithner as President Obama’s nominee for Treasury Secretary in November 2008 produced a cumulative abnormal return for Geithnerconnected financial firms of around 15 percent from day 0 (when the announcement was first leaked) to day 10. The quantitative effect is comparable to standard findings in emerging markets with weak institutions, and much higher than previous studies have found for the United States or other relatively rich democracies. The results hold when we control for how much firms were affected by the financial crisis, as well as in a wide range of other robustness checks. There were subsequently abnormal negative returns for connected firms when the news broke that Geithner’s confirmation might be derailed by tax issues. Since the Geithner nomination announcement, policy has been supportive of the financial services sector and Geithner-connected firms have continued to show positive cumulative abnormal returns, but there is no compelling evidence that Treasury implemented the exact form of favoritism implied by the stock market reaction. Our results pick up market expectations and the perceived value of connections at a moment of intense financial crisis, rather than how policy was subsequently designed or implemented.

78 page PDF

HT: Economic Policy Journal

Bunge Sees Upside to Drought (BG)

So what if they whiffed on earnings, even the Black Death wasn't all negative.
From Agrimoney:
Corporates squabble over impact of drought on farm profits
Will the US farm economy be brought low by drought-reduced yields, or will the boost to prices more than make up for lost production?
Agco warned over a potential setback to agricultural equipment groups, at least, from the US drought even as it unveiled a 50% jump in earnings, and raised expectations for its full-year performance.
However, the caution contrasted with those from many other agribusinesses, including fertilizer giant PotashCorp and crop trader Bunge, which highlighted benefits from the squeeze on crop supplies.
'Strong execution'
Agco, the maker of Massey Ferguson and Fendt farm equipment said that earnings for the April-to-June quarter hit $202.1m, or $2.08 a share, up from $133.9m a year before,
The increase reflected, besides the acquisition of silos group GSI, price rises, especially in North America and Europe, which lifted revenues by 14.1% to $2.69bn.
Meanwhile, costs were constrained by "low levels" of inflation in raw materials costs, reflecting less buoyant energy and metals markets.
"Agco's strong execution in the second quarter produced record earnings and operating margins of nearly 10%," Martin Richenhagen, the group's chairman and chief executive, said.
'Some uncertainty'
However, Mr Richenhagen added that while North American "farm economics remain healthy, the current drought conditions across much of the US have added some uncertainty for farm equipment demand for the remainder of 2012 in the region".
The statement clashed with more positive assessments on Thursday of drought implications for agribusiness giants.
PotashCorp and agrichemicals giant Syngenta forecast that higher crop prices would feed through into higher demand for crop inputs, while Bunge said that market uncertainty would drive farmers and consumers to larger crop traders....MORE

What To Do With Financial Criminals? Kill Them

From the WSJ's Jason Zweig at the Total Return blog:

Should Crimes of Capital Get Capital Punishment?
Overheard in midtown Manhattan at the lunch hour:

“Another day, another financial scandal. New regulations, prosecution, getting hauled up in front of Congressional hearings – nothing seems to stop it.”

“Maybe we need to try something more drastic.”
“Like what?”
“Well, there’s always the death penalty.”

Unfortunately, that’s been tried, too – and found wanting. Financial criminals throughout history have been beaten, tortured and even put to death, with little evidence that severe punishments have consistently deterred people from misconduct that could make them rich.

The history of drastic punishment for financial crimes may be nearly as old as wealth itself.
The Code of Hammurabi, more than 3,700 years ago, stipulated that any Mesopotamian who violated the terms of a financial contract – including the futures contracts that were commonly used in commodities trading in Babylon – “shall be put to death as a thief.” The severe penalty doesn’t seem to have eradicated such cheating, however.

In medieval Catalonia, a banker who went bust wasn’t merely humiliated by town criers who declaimed his failure in public squares throughout the land; he had to live on nothing but bread and water until he paid off his depositors in full. If, after a year, he was unable to repay, he would be executed – as in the case of banker Francesch Castello, who was beheaded in 1360. Bankers who lied about their books could also be subject to the death penalty.

In Florence during the Renaissance, the Arte del Cambio – the guild of mercantile money-changers who facilitated the city’s international trade – made the cheating of clients punishable by torture. Rule 70 of the guild’s statutes stipulated that any member caught in unethical conduct could be disciplined on the rack “or other corrective instruments” at the headquarters of the guild....MORE

How David Bowie Caused the Financial Crisis

From Minyanville:
The financial crisis that began in August 2007 had relatively little to do with traditional bank lending…Its prime cause was the rise and fall of "securitized lending," which allowed banks to originate loans but then repackage and sell them out.
-- Niall Ferguson, The Ascent Of Money
The dust is still settling from the great market crash of 2008-09, and we still don’t know exactly who or what to blame. It might have been securitization, but it probably wasn’t David Bowie.

Securitization is the process of taking a group of assets and transforming them into a tradable security. By aggregating them into one large pool, investor risk is, in concept at least, distributed more evenly. Asset-backed securities resemble bonds in that they pay a fixed amount of interest over a specific time period.

These securities can be backed by mortgages, credit card debt, car loans, or anything else that will (theoretically) generate future cash flow.

Like song royalties, for instance.

In 1997, a fellow named David Pullman introduced the world to Bowie Bonds.

Bowie Bonds were securities backed by the future revenues from 25 David Bowie albums -- 287 songs in all -- that David Bowie recorded before 1990.

Pullman arranged to sell $55 million worth of 10-year bonds to Prudential, in what was the first high-profile case of securities backed by intellectual property.

What was in it for Bowie?

Oh, just $55 million upfront, as opposed to waiting for the gradual accumulation of his royalty income to reach that level -- plus, the rights reverted back to him after 10 years.

Prudential (PRU), which bought the entire issue, received the revenues generated by those 25 albums until the principal plus 8% interest was repaid. Pullman, of course, got his cut, as well -- about $6 million.

Some in the British press have accused Bowie Bonds of being the catalyst that brought the entire banking sector down.

Come again?

Yes, the London’s Daily Mirror claims the Thin White Duke (and David Pullman, by association) are responsible for the financial doldrums through which the world has been slogging for the past two years by creating the idea of securitization....MORE
*In 1997 Mr. Bowie sold the cash flow from his pre-1990 back-catalogue to Prudential et al via the Pullman Group for $55 million. Here's Fortune in 2003:
Wall Street's Green Genie

David Bowie cashed in at the perfect time. But what's the real story with his bonds now?
...Bowie and his deal were considered cutting-edge at the time (isn't he always?), but in retrospect the Diamond Dog is looking positively clairvoyant! (Bowie declined to speak to Street Life for this article, which is too bad because I had some fantastic ideas for costumes and such....) Think about it. Bowie sells the rights to his catalog in January 1997, before most of humankind had ever heard the little phrase "file sharing." (I call it file stealing.) How smart or lucky was that?...
Here's one of the songs that was included in the deal: