Saturday, May 31, 2014

"Six Key Questions for the 2014 Atlantic Hurricane Season""

From Wunderblog:
The 2014 Atlantic hurricane season is officially underway on Sunday, June 1. What will this year's hurricane season bring? My top six questions for the coming season:

1) When will the first "Invest", tropical depression, and named storm of the 2014 Atlantic hurricane season form? We have a chance of all three of these events occurring in the Gulf of Mexico during the first week of hurricane season, though the models are currently hazy about this. An area of disturbed weather in the Eastern Pacific located a few hundred miles south of Southeast Mexico is forecast to move slowly northwards towards the Gulf of Mexico Sunday through Tuesday. In their 8 am EDT Friday Tropical Weather Outlook, NHC gave this system a 50% chance of developing into a tropical depression or tropical storm by Wednesday. The 06Z Friday run of the GFS model predicts that this disturbance will make landfall in Southeast Mexico on Tuesday, then spread moisture northwards over the Gulf of Mexico late in the week. The model predicts that wind shear will be light to moderate over the Gulf late in the week, potentially allowing the disturbance to spin up into a tropical depression. The 00Z Friday run of the European model has a different solution, predicting that the Eastern Pacific tropical disturbance will remain south of Mexico through Friday.
However, the model suggests that moisture streaming into the Gulf of Mexico late in the week will be capable of spawning an area of low pressure with the potential to develop in the Southern Gulf of Mexico's Bay of Campeche. In any case, residents of Southeast Mexico and Western Guatemala appear at risk to undergo a multi-day period of very heavy rainfall capable of causing flash flooding and dangerous mudslides beginning as early as Monday. This disturbance may cross over Mexico and into the Gulf of Mexico and create the Atlantic's first "Invest" with the potential to develop late in the week, sometime June 5 - 7.

Figure 1. Satellite image taken at 7:45 am EDT Friday May 30, 2014, showing an area of disturbed weather a few hundred miles south of Southeast Mexico. Will this disturbance cross over into the Gulf of Mexico and create the Atlantic's first "Invest" of 2014 late in the week? Image credit: NASA/GSFC.

2) All of the major seasonal hurricane forecasts are calling for a below-average to near-average season, with 9 - 12 named storms, 3 - 6 hurricanes, and 1 - 2 major hurricanes. Hurricane seasons during the active hurricane period 1995 - 2013 averaged 15 named storms, 8 hurricanes, and 4 major hurricanes. Will an El Niño event indeed arrive, bringing reduced Atlantic hurricane activity, allowing the pre-season predictions to redeem themselves after a huge forecast bust in 2013?

3) How will the steering current pattern evolve? El Niño years tend to feature more storms that recurve out to sea and miss land; will this be the case in 2014?...MORE

Questions Americans Want Answered: Which Drone Best Fits My Lifestyle?

From Popular Mechanics:

Best vs. Budget: Which Drone Should You Buy?
Affordable drones are flooding the market. Our current favorites: The capable DJI Spreading Wings S1000 and the budget-minded Blade 180 QX HD.

DJI Spreading Wings S1000

Price: $3600
Diagonal width: 41.1"

Flaunting eight powerful blades on retractable carbon-fiber arms, the S1000 octocopter is as steady as it is daunting. The remote-controlled workhorse lugs up to 15 pounds of camera equipment—enough to shoot next summer's blockbuster. What's more, the UAV stays aloft for 15 minutes and can maintain stability even in the event of a midair rotor loss. Watching the attachable lower gimbal fluidly move to keep a camera steady as its rotors maneuver above is almost creepy.

Blade 180 QX HD

Price: $150
Diagonal width: 11.5"

The 180 QX is compact enough to land on the palm of your hand, but this 3.3-ounce bot packs a lot of tech under its shell. With the drone's adjustable flight-stability software, built-in 720-pixel camera, and intuitive remote control, it flies smoothly for 10 minutes per charge and delivers quality video that easily competes with its larger rivals'—at a fraction of the cost. Ready to go right out of the box, it's an ideal starter for the uninitiated.

Competitive Intelligence Macquarie Style: First Establish a Fake Family Office...

From Stock(moo)Journal (Australia):

Macquarie used fake email to get secrets 
A SENIOR executive at Macquarie Group was involved in establishing a fake family office to extract confidential financial information from a competitor.

An investigation by The Australian Financial Review has found that Tim Hornibrook, head of Macquarie Agricultural Funds Management, obtained sensitive details about a competitor's profits, fee structure and returns by posing as a wealthy investor.

Mr Hornibrook sought the information on his competitor at a time when Macquarie was trying to raise $700 million through the investment vehicle Macquarie Crop Partners, sources said.

An email was sent in late 2011 from a Macquarie office in London claiming to be from a private investor called the Brook Family Office.

Using the address, the email said the fictitious company was considering investing in the fund and needed detailed financial, performance and organisation information. The competitor, believing it was a legitimate potential investor, provided a detailed response days after receiving the email.
The email's details show it originated from the computer of a junior marketing employee at Macquarie Funds in London. A Macquarie spokesman said the bank "expects the highest standards of its employees and will be fully investigating this matter".

Mr Hornibrook, a well-known figure in agribusiness investment, did not respond to questions put to him through Macquarie. The revelations are likely to focus attention again on how it conducts business at a time when global investment banks are still under fire for their role in the global financial crisis.

The competitor that unwittingly disclosed the information to Macquarie does not wish to be named and is considering taking legal action....MORE 

Attention Lobbyists: Home for Sale, Potomac, MD

From Homes of the Rich:
$14 Million 19,000 Square Foot Limestone Mansion In Potomac, MD

A Million Ways to Die in the Market: Dow Industrials, S&P 500 Hit Record Highs, Still Puzzle Pundits

"1 billion, gagillion, fafillion, shabolubalu million illion yillion..."*

From Barron"s:
There are a million ways to die in the market–and A Million Ways to Die in the West. The former we’ll get to in a minute; the latter is a new movie from the Family Guy’s Seth MacFarlane that spoofs films like Once Upon a Time in the West, A Fistful of Dollars and any number of classic westerns. Rolling Stone’s Peter Travers gives A Million Ways to Die a middling review but notes that “there are lots of ways to die laughing at this Western raunchfest,” while the Wall Street Journal’s Joe Morgenstern says it’s “seldom as funny as it promises to be.” The New York Times Stephen Holden says you “might call the movie ‘Revenge of the Übernerd.’” A Million Ways won’t top the box officethat honor will go to Walt Disney’s (DIS) Maleficent–but if nothing else its a reminder of just how nasty, brutish and short life was back in the good old days of the Wild West.
Just like trading in the markets. The financial markets love to punish those who think they know all the answers, and that’s exactly what they’ve done this year. Very few people thought Treasury yields would fall this year, but that’s exactly what they’ve done. And no one expected the complete wash out in high-flying stocks like Twitter (TWTR) and Amazon (AMZN), but that’s exactly what we got.
Now everyone is simply confused. Sure, the S&P 500 gained 1.2% to 1,923.53 this week–another record high–while the Dow Jones Industrial Average rose 0.7% to 16,717.17–also a record high. The Nasdaq Composite jumped 1.4% to 4,242.62. The CBOE Volatility Index, also known as the VIX, fell to 11.40. That’s very low.
Strategists, however, would like to see bigger gains from the beaten-down Russell 2000, which advanced just 0.7% to 1,134.50 and continues to lag big caps. The 10-year Treasury yield fell 0.19 percentage points to 2.46% this week, the third lowest this year–causing more worry among those who think the bond market is always right.

The mixed signals were apparent even among the S&P 500′s best performing stocks, including  Exelon (EXC), a utility that’s nearing completion of a merger with Pepco Holdings (PHI), and Priceline (PCLN), a high-flying internet stock that rose, well, because it could. Exelon gained 7.9% to $36.83 this week, while Priceline rose 6.8% to $1,278.63.

Bespoke Investment Group sums up the market’s vibe:
It was a short week for traders and investors due to the Memorial Day holiday on Monday, but that didn’t stop the market from continuing to amaze (or confuse) as many as possible. In a week where Q1 GDP was revised down to negative 1% on an annualized basis, which was the lowest level of growth in three years, the S&P 500 followed through from last week’s peek to new highs and continued to trade at levels never before seen.
Citigroup’s Robert Buckland and team aren’t worried about falling bond yields:
This year’s rally in US Treasuries has caught most investors by surprise. 10 year yields have fallen from 3.0% at the start of the year to 2.4% at present, despite the previous consensus expectation of yields rising towards 3.25% by the end of the year. So why has the US bond market caught so many out? Perhaps the most obvious reason is that too many investors were already positioned for a further increase in treasury yields. There has been a classic bear squeeze....MORE
*That's Dr. Evil's demand (in Yen) in the third Austin Powers film about which Wikipedia comments:
This time his demand is met with simple confusion from the world leaders.

"Classic Time Travel Paradoxes (And How To Avoid Them)"

Because the last thing you need is some grizzled old time-traveler looking at you and sneering "Rookie".
(it's all about how to think) 

From Quirkbooks:

Author's Note: I assume that some day, this article will serve as an invaluable guide and warning for our time traveling ancestors-to-be (who will of course be unable to read books and learn these lessons for themselves, either because [a] all the books will have been burned, or [b] kids will have stopped reading books entirely, because grumble grumble, god damn kids, when I was your age, video games, blah blah, detriment to society, buncha hooligans, kids these days, no respect, etc). In the meantime, just enjoy it for all of its delightfully entertaining/convoluted/paradoxical pleasures.

As anyone who’s anyone who’s read any time travel story ever could easily tell you, time travel is a tricky subject. Temporal paradoxes might seem simple and straightforward at the start (no they don’t), but they always devolve quite quickly (linear time-wise) into some sort of trippy, philosophically complicated, timey-wimey conundrum that makes even the most convoluted middle school relationship make sense by comparison. Come to think of it, maybe the reason that all those cool kids in middle school suffer from impossibly complicated and melodramatic romances to begin with is because they’re all too “cool” to read time travel stories in the first place, which would obviously teach them the benefits of temporally linear dating, if nothing else.
I’m looking at you, River Song.

For the most part, any paradox related to time travel can generally be resolved or avoided by the Novikov self-consistency principle, which essentially asserts that for any scenario in which a paradox might arise, the probability of that event actually occurring is zero -- or, to quote from LOST, “whatever happened, happened,” meaning that no matter what anyone does, they can’t actually create a paradox, because the laws of quantum physics will self-correct to avoid such a situation. Still, I’m wary of such a loose explanation for things, and so below, I’ve compiled a list of a few of the more popular time travel paradoxes -- and what to do to avoid them.
ONTOLOGICAL PARADOX: Also known as the “Bootstraps Paradox,” an ontological paradox arises when a person or object is sent through time and recovered by another person, whose actions then lead to the original person or object back to the time from when it came in the first place, thus creating an endless loop with no discernible point of origin. Thus, the original person or object is essentially “pulling itself up by its own bootstraps,” hence the nickname (thanks in no small part to the Robert Heinlein story “By His Bootstraps”).

Example: The Terminator films are a prime and popular example of the Ontological Paradox. In the future, a Terminator is sent back in time to kill the mother of resistance leader John Connor before he is born. While the original T-800 is ultimately destroyed, the leftover pieces are found by scientists who use the technological to...develop and create Skynet, and the Terminator-series robots. Skynet would have never been created if Skynet hadn’t taken over the world and then sent a Terminator back in time to get destroyed and ultimately lead to the creation of Skynet. Trippy, right?

There's also the fact that Future John Connor sends his buddy Kyle Reese back in time to protect his mother from the T-800, only Kyle ends up totally bangin' John's mom (dude high five! I mean, not cool, man) and impregnates her with his buddy John Connor. So to top it all off, if John hadn't sent his friend back in time, his friend would never have had sex with John's mom, and John would never have been born (meaning that Kyle Reese is either the best or worst friend, ever).

How to Avoid: No one’s really sure if a real-life ontological paradox would lead to some massive hemorrhaging of spacetime, or if the closed loop is kind of automatically self-corrected since it all works itself out evenly in the end anyway. Still, better to avoid these kind of complicated situations, and the best way to do that would simply be to stop taking candy from strangers -- “candy” in this case being mysterious or alien artifacts with questionable origins, possibly given to you by mysterious people who may or may not come from the future. See? Maybe all those warnings that your Mom gave you when you were a little kid still mean something today. Or maybe all along she was just trying to prevent you from sending your friends back in time to sleep with her. Or perhaps encourage it....MUCH MORE
Also at Quirkbooks "Worst-Case Wednesday: How to Jump from a Building Into a Dumpster".
(they are the home of Worst-case scenario)

For more on how to think we have on offer:
Logical Fallacies (or How to open your mouth without removing all doubt*)
Infographic: Rhetorical Techniques and Logical Fallacies PLUS How to Win Any Argument
The Greatest Soccer Match Ever!

We've visited the topic a few times because, as I said in 2007's "Supporting ethanol: a profile in courage? Call the Police!":
I am reasonably competent at manipulating language and other symbols, and in recognizing the techniques of rhetoricians and homilists.*
Sometimes though, politicians baffle me.... 
*Sting nailed it in "De Do Do Do De Da Da Da"
Poets, Priests and Politicians
Have words to thank for their position
Words that scream for your submission
And no-one's jamming their transmission
'Cos when their eloquence escapes you
Their logic ties you up and rapes you...
-The Police

"The Inside Story of Oculus Rift and How Virtual Reality Became Reality"

Back in the '90s I was approached by some guys who thought they had "the breakthrough" to make VR real but they just couldn't solve the 'uncanny valley'*. I'm not sure that Oculus Rift has either but it's much closer.

From Wired:

As he flew from Orange County to Seattle in September 2013, Brendan Iribe, the CEO of Oculus, couldn’t envision what the next six months would bring. The rhapsodic crowds at the Consumer Electronics Show. The around-the-block lines at South by Southwest. Most of all, the $2 billion purchase by Facebook. That fall Oculus was still just an ambitious startup chasing virtual reality, a dream that had foiled countless entrepreneurs and technologists for two decades. Oculus’ flagship product, the Rift, was widely seen as the most promising VR device in years, enveloping users in an all-encompassing simulacrum that felt like something out of Snow Crash or Star Trek. But it faced the same problem that had bedeviled would-be pioneers like eMagin, Vuzix, even Nintendo: It made people want to throw up.

This was the problem with virtual reality. It couldn’t just be really good. It had to be perfect. In a traditional videogame, too much latency is annoying—you push a button and by the time your action registers onscreen you’re already dead. But with virtual reality, it’s nauseating. If you turn your head and the image on the screen that’s inches from your eyes doesn’t adjust instantaneously, your visual system conflicts with your vestibular system, and you get sick.

There were a million little problems like that, tiny technical details that would need to be solved if virtual reality were ever to become more than a futurist’s fantasy. The Rift had made enough headway to excite long-suffering VR enthusiasts, but it was still a long way from where it needed to be.

“This is the first time that we’ve succeeded in stimulating parts of the human visual system directly.”
But then Iribe got a call from Michael Abrash, an engineer at Valve; the gaming software company had conducted VR research for a while and had begun collaborating with Oculus. Valve had a new proto­type, and it didn’t make people sick. In fact, no one who had tried the demonstration had felt any discomfort. Iribe, who was famously sensitive to VR-induced discomfort—“cold sweat syndrome,” he calls it, or sometimes “the uncomfortable valley”—flew up to Valve’s offices outside Seattle to be the ultimate guinea pig.

Abrash escorted Iribe into a small room tucked off a hallway. The walls and ceilings were plastered with printouts of QR-code-like symbols called fiducial markers; in the corner, a young engineer named Atman Binstock manned a computer. Connected to the computer was Valve’s proto­type headset—or at least the very beginnings of a headset, all exposed circuit boards and cables. Iribe slipped it over his head and found himself in a room, the air filled with hundreds of small cubes.

He turned his head to look behind him—more floating cubes. Cubes to the left, cubes to the right, cubes overhead, floating away into infinity. Iribe leaned forward and peered around to see the side of the cube closest to him; he crouched and could see its underside. A small camera on the headset was reading the fiducial markers on the (real) wall and using that spatial information to track his position among the (virtual) cubes. So far, so good; no motion sickness yet....MORE
HT:The Big Picture's 10 Weekend Reads post.

*From last week's "Seinfeld, Virtual Reality and Mild Revulsion":
The Uncanny Valley, Interior-Design Edition
Greg Miller
The "uncanny valley" usually applies to human aesthetics. It describes that vague sense of revulsion you get when you see a fabricated person—a robot, usually—who looks aaaaalmost human … but not quite. So, for example, this lady. This dude. Anything displayed here. The "valley" refers to the emotional reactions humans have toward anthropomorphized machines, when those reactions are charted: It's the deep dip in comfort level we tend to experience, based on our finely honed survival instincts, when we humans come face-to-quasi-face with beings that are at once extremely like us and extremely not....MORE

Friday, May 30, 2014

Mary Meeker’s Annual Rapid-Fire Internet Trends Talk (Video)

From re/code:
Mary Meeker can synthesize trends, pinpoint interesting numbers and research, and deliver hundreds of slides like nobody’s business. The Kleiner Perkins partner presented her annual Internet trends report at the inaugural Code Conference this week.

Meeker highlighted the stunningly quick growth of mobile data usage, said the current tech bubble — if you want to call it that — pales in comparison to that of 1999 and 2000,...MORE, includes slideshow.

"Phil Falcone Asks FCC to Mitigate Further Damage to Him"

From DealBreaker:, whose Harbinger Capital hedge fund owns the bankrupt LightSquared, a high-speed wireless start-up, is asking the Federal Communications Commission to take “immediate” action to stem the barrels of red ink flowing from the company. 

In a letter to the FCC, Falcone is urging the regulator to “mitigate further damage” to Harbinger, which invested $3 billion in LightSquared only to see the agency pull the plug on the company in 2012. On Wednesday, Falcone asked the FCC to take “immediate, positive action” to reverse Harbinger’s losses, according to the letter sent by his legal team. [NYP]

Also at DealBreaker:
Monument To Hedge Fund Manager’s Love Of Chickens Nearly Complete

"We'll Find Alien Life in This Lifetime, Scientists Tell Congress"

Alien life 'likely' and will be discovered 'in this lifetime', say scientists
Humans have long wondered whether we are alone in the universe. According to scientists working with the Search for Extraterrestrial Intelligence (SETI) Institute, the question may be answered in the near future.
"It's unproven whether there is any life beyond Earth," Seth Shostak, senior astronomer at the SETI Institute, said at a HouseCommittee on Science, Space and Technology hearing Wednesday (May 21). "I think that situation is going to change within everyone's lifetime in this room."...

Gold and Silver Are Approaching a Waterfall Decline (GLD; SLV)

Gold is at $1245.00, down $11.30 and down $46.70 for the week.
From Kitco:

Comex Gold Extends Slide On Technically Oriented Selling
U.S. gold futures are extending the losses from earlier this week Friday largely on technically oriented selling, traders said.

As of 11:17 a.m. EDT, gold for August delivery was $12.10, or 1%, lower to $1,245 per ounce on the Comex division of the New York Mercantile Exchange. The contract bottomed at $1,243.70, its weakest level since February. July silver was down 24.9 cents, or 1.3%, to $18.765 an ounce.

“It’s technical more than anything else,” said Charles Nedoss, senior market strategist at LaSalle Futures Group.

The market dipped below the roughly $1,250-an-ounce level that was offering support after prior weakness this week. “You picked up some (sell) stops there,” Nedoss said. These are pre-placed orders activated when certain chart points are hit, either to book profits, exit a losing position or establish a fresh one....MORE
While both of the "Money" metals are looking weak, silver in particular is interesting as it goes through what had been support:

July futures $18.690 down 0.324


May 13
Silver Is Very Close to a Breakdown
July futures $19.425 down 0.118....
May 20
Silver Prices: A Trend Is Emerging 
July futures $19.29 down 4.3 cents.
More to come.

Why Are Yields Falling?

More trade volume initiated by buyers than sellers.

From FT Alphaville a more nuanced look:

The ‘other’ great bond mispricing theory
A lot of people are puzzled over why US yields are falling when nothing has changed on the Fed communication side, and QE is supposed to be slowing.
Frances Coppola notes an even stranger phenomenon. When you look at the very big picture you realise that if there is a correlation between QE and rates, it’s actually a very counterintuitive one:
Every time QE is announced, yields rise: when it ends, they fall. And no, this doesn’t just affect the 10-year yield. The same basic shape can be observed on just about any maturity over 1 year (short-term rates are propped up by the positive IOER policy).

It’s counterintuitive because people tend to believe that QE suppresses rates by creating a bid where there otherwise wouldn’t be one.

The standing theory, consequently, is that a QE exit should encourage rising yields....MUCH MORE

The Day The Towel-folding Robot Overlords Came Into Our Lives

Who can forget where they were when they first saw this:

From IEEE Spectrum:

So, Where Are My Robot Servants?
Tomorrow’s robots will become true helpers and companions in people’s homes—and here’s what it will take to develop them

Four years ago, researchers at the University of California, Berkeley, uploaded a video to YouTube. It featured a demonstration they’d done using a powerful new robot called PR2, a dishwasher-size machine with two hefty arms and six camera eyes on its face. In the demo, PR2 stands before a disorderly pile of small towels. Then, slowly but surely, it stretches its arms, picks up a towel, and neatly folds it, even patting it gently to smooth out the wrinkles. The robot repeats the routine until no more towels are left in the heap.
The researchers were pleased with their work, but they didn’t quite expect what came next: Their video went viral. Within days, hundreds of thousands of people watched it as news of the robot spread through social media and the blogosphere. Reports popped up on newscasts and publications around the world. One Twitter user humorously summed up what the achievement might portend: “I, for one, welcome our towel-folding robot overlords.”

This robotic laundry experiment had obviously struck a nerve. The idea of robots doing chores around the house has long captured people’s imaginations. For some, robots would mean freedom from tasks they don’t have time for or don’t want to do. For others, robots would mean even more: They would help them live independently longer, providing care and perhaps even some degree of companionship.

It’s disappointing, then, that other than robotic toys and vacuum cleaners, robots are a rare sight in our homes today. And yet, here we are, still eagerly waiting for this technology to blossom. So, where are the robot servants?

Some recent developments suggest that they might not be too far away. Processors, sensors, and other components that robots need have gotten much better and cheaper, propelled by advances in smartphone technology....MORE

Free for 1 Month: The Journal Science on the Science of Inequality

From Science:

The science of inequality 
What the numbers tell us
In 2011, the wrath of the 99% kindled Occupy movements around the world. The protests petered out, but in their wake an international conversation about inequality has arisen, with tens of thousands of speeches, articles, and blogs engaging everyone from President Barack Obama on down. Ideology and emotion drive much of the debate. But increasingly, the discussion is sustained by a tide of new data on the gulf between rich and poor. 

This special issue uses these fresh waves of data to explore the origins, impact, and future of inequality around the world. Archaeological and ethnographic data are revealing how inequality got its start in our ancestors (see pp. 822 and 824). New surveys of emerging economies offer more reliable estimates of people's incomes and how they change as countries develop (see p. 832). And in the past decade in developed capitalist nations, intensive effort and interdisciplinary collaborations have produced large data sets, including the compilation of a century of income data and two centuries of wealth data into the World Top Incomes Database (WTID) (see p. 826 and Piketty and Saez, p. 838). 

It is only a slight exaggeration to liken the potential usefulness of this and other big data sets to the enormous benefits of the Human Genome Project. Researchers now have larger sample sizes and more parameters to work with, and they are also better able to detect patterns in the flood of data. Collecting data, organizing it, developing methods of analysis, extracting causal inferences, formulating hypotheses—all of this is the stuff of science and is more possible with economic data than ever before. Even physicists have jumped into the game, arguing that physical laws may help explain why inequality seems so intractable (see p. 828)....MORE 
Some of the related articles: 

The ancient roots of the 1%
Don't blame farming. Inequality got its start among resource-rich hunter-gatherers. 
Our egalitarian Eden
Today's economic inequality goes back thousands of years but in evolutionary time it is relatively recent. 
Physicists say it’s simple
If the poor will always be with us, an analogy to the second law of thermodynamics may explain why.


HT: Columbia's Chris Blattman

While I Contemplated Writing 700,000 Words On Piketty, The FT's Money Supply Came Back Swinging

This whole thing could have been avoided with a little peer review but no; Piketty had to write a book and commenters had to comment without the least bit of effort beyond turning the pages.

I swear economists have to be the most worthless, most self-absorbed bunch of scamsters one is likely to run into.

So there I was, gathering my thoughts, such as the above, for the 700K word comment when Chris Giles drops out of one of the feedreaders.
From Money Supply:

Capital in the 21st Century – a response
Professor Thomas Piketty has given a more detailed response to the Financial Times articles and blogs on his wealth inequality data in Capital in the 21st Century (here, here, here and here). He says it is “simply wrong” to suggest he made errors in his data.

There are a few things on which we agree. First, the source data on wealth inequality is poor. I have written that it is “sketchy” and Prof Piketty says it is “much less systematic than we have for income inequality”. Second, it would have been preferable for Prof Piketty to have used a more sophisticated averaging technique than a simple average of Britain, France and Sweden to derive an estimate for European wealth inequality. Third, the available data suggests a broad trend of reduction in wealth inequality during most of the 20th Century.

There are more aspects on which there remains disagreement. Prof Piketty does not explain the multiple missing data points in his data or tweaks to it; he explains transcription errors as deliberate adjustments to overcome discontinuities in data, but does not provide formulas or an explanation of why these undocumented adjustments should apply to only one data point in a time series; he does not explain why it is consistent to favour household surveys over estate tax records for the US but not the UK; nor why his UK series showing rising wealth inequality differs so materially from his source materials, which show falling UK wealth inequality in eight of the most recent nine decades....MORE

EIA Natural Gas Weekly Update: Russian Exports to Western Europe

From the Energy Information Administration:
In the News:
Russian natural gas pipeline exports to Western Europe grow 20%
In 2013, Russia exported an average of 15.6 billion cubic feet per day (Bcf/d) of natural gas on pipelines to countries in Eastern and Western Europe, 16% more than in 2012, according to data from the U.S. Energy Information Administration, Eastern Bloc Research, and Russian Energy Monthly. Russia's natural gas pipeline exports to Western Europe drove most of this increase, rising by 20%, to 12.3 Bcf/d.
The entire increase in Russian natural gas exports to Western Europe in 2013 occurred in three countries – Italy, Germany, and the United Kingdom:
  • Italy had the largest increase in natural gas pipeline imports from Russia in 2013, receiving 2.4 Bcf/d of natural gas. This reflected a 1.0 Bcf/d increase over 2012. Italy accounted for 16% of total Russian natural gas pipeline exports to Eastern and Western Europe in 2013, versus 11% in 2012. Italy can receive Russian natural gas on the Bratstvo (Brotherhood) and Soyuz (Union) pipelines, which pass through Ukraine.
  • Germany saw its natural gas pipeline imports from Russia increase in 2013 to 3.9 Bcf/d. This was 0.7 Bcf/d over 2012 levels. Germany can receive Russian gas on the same pipelines as Italy, as well as the Yamal-Europe and Northern Lights pipelines. However, most of Germany's Russian gas imports now flow via the Nord Stream pipeline, which bypasses transit states, such as Ukraine and Poland, and brings gas directly from Russia via the Baltic Sea.
  • The United Kingdom's natural gas pipeline imports from Russia increased to 1.2 Bcf/d in 2013, 0.4 Bcf/d more than in 2012. The United Kingdom mainly imports natural gas from Russia via the Nord Stream pipeline, along with other interconnecting pipelines.
Currently, Russia's entire natural gas pipeline exports flow to Europe, with the exception of small volumes to Armenia, in Eurasia....MUCH MORE

"Who Solved the Capitalist’s Dilemma?" Capex and Market Creation ARE Correlated

From Asymco:
In The Capitalist’s Dilemma, Clayton Christensen and Derek van Bever introduce a powerful new theory which explains the relative paucity of growth in developed economies. They draw a causal relationship between the mis-application of capital in pursuit of innovation and the failure to grow.[1]

In particular, they observe that capital is allocated toward the type of innovations which increase efficiency or performance and not toward those which create markets (and hence long term growth and jobs.) This itself is caused by a prioritization and rewarding of performance ratios rather than cash flows and that itself is due  to a perversion of the purpose of the firm.[2]

For this statement of causality to be confirmed we need to observe whether it predicts measurable phenomena. For instance, we need to see whether companies which create markets apply capital toward market-creating innovations and whether companies which create value through efficiencies or performance improvements hoard abundant capital.

Over the entire global economy, the pattern of capital over-abundance is easy to see. The amount of cash or securities on balance sheets is extraordinary and unprecedented (estimated at $7 Trillion, doubling over a decade). However, growing cash is not a perfect indicator of inactivity. Cash is the by-product of earnings after investment. So if operating profits are growing and investment is growing, but not as fast, then it’s possible to grow cash while still growing investment.

The better measure is investment in capital equipment or, more specifically, purchases of plant, property and equipment.[3] Indeed, on a global scale, capital expenditure as a percent of sales is at a 22-year low.
CapEx is a good proxy for non-financial “investment”. It’s also a measure that can be easily obtained as companies report this activity in their Cash Flow Statements....MORE

"When Growth Beats Value: Removing Tail Risk From Global Equity Momentum Strategies"

A new paper via the Social Science Research Network:
We investigate the relationship between value, growth and momentum investment styles across a wide range of developed and emerging economy equity markets. As would be anticipated, value investing generally beats growth. We then determine whether the application of relative momentum or trend following filters can enhance the risk-adjusted performance for either value or growth investors. We find that both value and growth portfolios benefit from momentum filters but particularly the latter, though the application of such a filter still leaves investors with return volatility that is typical of equity markets along with negative skewness and with high maximum drawdowns. However, our results show that the use of a simple trend following filter typically delivers a much more favourable investment performance than relative momentum with considerably lower volatility and smaller drawdowns. Furthermore, the application of a simple trend following filter either on its own or in combination with a relative momentum filter, not only reduces the performance advantage of value over growth investing but actually reverses this advantage.

...MORE (37 page PDF)

Thursday, May 29, 2014

Why One May Want To Think Twice About Meditating To Make a Killing On Wall Street

We've looked at the sheer nuttiness of things Indian for many years, from the marvelous use of English to the silver markets to more serious matters. (Can Hindu Deities Open Brokerage Accounts Allowing them to Trade Securities?)

So when we saw the Bloomberg story "To Make a Killing on Wall Street, Start Meditating" (HT: Barry Ritholtz) we didn't immediately jump at the opportunity.

From The Telegraph:
The family and followers of one of India’s wealthiest Hindu spiritual leaders are fighting a legal battle over whether he is dead or simply in a deep state of meditation.

His Holiness Shri Ashutosh Maharaj, the founder of the Divya Jyoti Jagrati Sansthan religious order with a property estate worth an estimated £100 million, died in January, according to his wife and son.
However, his disciples at his Ashram have refused to let the family take his body for cremation because they claim he is still alive.

According to his followers, based in the Punjab city of Jalandhar, he simply went into a deep Samadhi or meditation and they have frozen his body to preserve it for when he wakes from it.

His body is currently contained in a commercial freezer at their Ashram....MORE
And If you are curious  Bombay High Court Rules Hindu Deities MAY NOT Trade Securities

Climateer Line of the Day: What Will Happen If Banks Are Prosecuted Edition

“Companies, especially financial institutions, will do almost anything to avoid a tough enforcement action and therefore have a natural and powerful incentive to make prosecutors believe that death or dire consequences await,” he said. “I have heard assertions made with great force and passion that if we take any criminal action, the skies will darken; the oceans will rise; nuclear winter will be upon us; and the world as we know it will end.”  
-Preet Bharara, 
U.S. Attorney for the Southern District of New York
Via Bloomberg
HT: WashingtonsBlog

The Algorithms that Dominate our World Are More Basic Than You Might Think

From Medium:

The real 10 algorithms that dominate our world
The other day, while I was navigating Reddit I found an interesting post that was called The 10 Algorithms That Dominate Our World by the author George Dvorsky which was trying to explain the importance that algorithms have in our world today and which ones are the most important for our civilization.

Now if you have studied algorithms the first thing that could come to your mind while reading the article is “Does the author knows what an algorithm is?” or maybe “Facebook news feed is an algorithm?” because if Facebook news feed is an algorithm then you could eventually classify almost everything as an algorithm. So I’m going to try to explain in this post what an algorithm is and which are the real 10 (or maybe more ) algorithms that rule our world. 

What is an algorithm?
Informally, an algorithm is any well-defined computational procedure that takes
some value, or set of values, as input and produces some value, or set of values, as
output. An algorithm is thus a sequence of computational steps that transform the
input into the output. Source: Thomas H. Cormen, Chales E. Leiserson (2009), Introduction to Algorithms 3rd edition.
In simple words is possible to say that an algorithm is a sequence of steps which allow to solve a certain task ( Yes, no just computers use algorithms also humans use them). Now, an algorithm should have three important characteristics to be considered valid:
  1. It should be finite: If your algorithm never ends trying to solve the problem it was designed to solve then it is useless
  2. It should have well defined instructions: It has to be precisely defined each step of the algorithm; the instructions should be unambiguously specified for each case.
  3. It should be effective: The algorithm should solve the problem it was designed to solve. And it should be possible to demonstrate that the algorithm converges with just a paper and pencil.
Also is important to say that algorithms are used in Computing Sciences but they are a mathematical entity, in fact the first mathematical algorithms that we have registry are from 1600 BC — Babylonians develop earliest known algorithms for factorization and finding square roots. So here we have the first problem with the post mentioned before, it treats algorithms as computing entities, but if you take the formal meaning of the word the real top 10 algorithms that rule the world can be found in a book of arithmetic (addition, subtraction, product, etc).

But lets take computing algorithms as our definition of algorithm in this post, so the question remains: Which are the 10 algorithms that rule the world?. Here a put a little list of which are this algorithms in no particular order.

1. Merge Sort, Quick Sort and Heap Sort
What is the best algorithm to sort elements? It depends in what you need and that’s why I put the three more used sort algorithms in the same place, maybe you have a preference in one of them but all of them are equal important.
The Merge Sort algorithm is by far one of the most important algorithms that we have today. It is a comparison-base sorting algorithm that uses the approach divide and conquer to solve a problem that once was a O(n^2). It was invented by the mathematician Jhon von Neumann in 1945.

Quick Sort is a different approach to the sorting problem, it can use in-place partition algorithms and is a divide and conquer algorithm too. The problem with this algorithm is that is not a stable sort but is really efficient for sorting RAM-based arrays.

Finally, Heap Sort algorithm uses a priority queue that reduces the search time in the data. This algorithm is also an in-place algorithm and is not stable sort.

These algorithms are a big improvement over other approaches used like bubble sort, in fact is thanks to them that today we have Data mining, artificial intelligence, link analysis and most of the computing tools in the world including the web. 

2. Fourier Transform and Fast Fourier Transform
Our entire digital world uses these simple but really powerful algorithms that transform signals from their time domain into their frequency domain and viceversa. In fact, you are seen this post thanks to these algorithms.
The internet, your WiFi, smartphone, phone, computer, router, satellites, almost everything that has a computer inside use this algorithm to work, in one way or another. You can’t study a degree in electronics, computing or telecommunications without studying these important algorithms.

3. Dijkstra’s algorithm
Is not crazy to say that the internet wouldn't work as efficient as it does if it wasn't because of this algorithm. This graph search algorithm is used in different applications where the problem can be modeled as a graph and you have to find the shortest path between two nodes.

Even when today we have better solutions for the problem of finding the shortest path, Dijkstra’s algorithm is still used in systems that require stability....MORE

So Much For That $90K per Annum: "Uber will eventually replace all its drivers with self-driving cars"

Following up on "Uber Says Uber Drivers Earn $90,000 Per Year In New York City".
From The Verge:
Uber will eventually replace the people who drive its cars with cars that drive themselves, CEO Travis Kalanick said today at the Code Conference. A day after Google unveiled the prototype for its own driverless vehicle, Kalanick was visibly excited at the prospect of developing a fleet of driverless vehicles, which he said would make car ownership rare. "The reason Uber could be expensive is because you're not just paying for the car — you're paying for the other dude in the car," Kalanick said. "When there's no other dude in the car, the cost of taking an Uber anywhere becomes cheaper than owning a vehicle. So the magic there is, you basically bring the cost below the cost of ownership for everybody, and then car ownership goes away."...MORE

Saaay, This "Financing Solar" Might Be for Real: SunEdison up 9% On 'Yieldco' IPO News (SUNE)

The stock is at $21.18, up $1.71. For the last couple years the money has definitely not been in the module or polysilicon makers but rather in the installers and financiers, especially the latter, links after the jump.
From MarketWatch:
SunEdison Inc. rallied Thursday following news its “yieldco” subsidiary has filed for an initial public offering.

TerraForm Power will own and operate clean-power plants and other assets acquired from SunEdison SUNE +8.65%  and other companies, SunEdison said. 

Goldman Sachs and Barclays are the joint bookrunners, and price and number of shares have not been decided yet, it added. 

SunEdison is following on the footsteps of giant NRG Energy Inc., which last year launched NRG Yield Inc., bundling solar and natural gas power-generation assets and raising nearly $500 million in capital in July.
Shares of Missouri-based SunEdison rose 9.4%. 

Several solar companies are looking into bundling existing solar-power plants and projects into subsidiaries, known in the industry as “yieldcos.” 

Revenues would flow from long-term, predictable power purchase agreements with utilities, and shares of the yieldcos would trade in stock exchanges just like any stock, providing liquidity and transparency....MORE
Entrepreneur Trades Sex for Solar
Finally for investors in rent-seeking organizations there is the real risk that the politicians will change the rules. Heed the words of Sen. Simon Cameron (R&D!-Pa.):
Our Hero
Simon Cameron
"The honest politician is one who when he is bought, 
will stay bought."

Getting the Band Back Together: Russia, Belarus, Kazakhstan to Formalize Trade Bloc (Kyrgyzstan, Armenia hope to join by year end)

From Asharq al-Awsat:

Putin forms ex-Soviet trade bloc to challenge EU, US 
Astana, Kazakhstan—Russian President Vladimir Putin Thursday signed a treaty with his counterparts from Kazakhstan and Belarus creating a trading bloc of more than 170 million people to challenge the United States and European Union.

The formal creation of the Eurasian Economic Union in the Kazakh capital of Astana marks the culmination of two decades of talks between former Soviet republics.

Kyrgyzstan and Armenia are seeking to join the union by the end of the year, the countries’ leaders said at the signing ceremony today.

Putin, facing sanctions from the US and EU for his annexation of Crimea from Ukraine, said the three countries will “gradually align” their currency and monetary policies to facilitate trade and minimize risks. The Russian leader has pushed for Ukrainian membership in the union and, before relations soured with the EU, urged the creation of a free-trade zone from Lisbon to Vladivostok on the Pacific Ocean.

“The Eurasian Union is a realization of Putin’s geopolitical dream,” said Nikolay Petrov, a scholar at the Carnegie Moscow Center research group. “The Eurasian Union is a demonstration that Russia is not alone.”...MORE
No word on what this means for Kazakhstan's "Don't call me Stan" name change

EIA Storage Report: Natural Gas Injections a Bit High, Futures Say Meh

We had estimates coming in at 107-111 bcf but as always it's the second derivative that matters: not the actual number and not what the other guy thinks the number will be but how Guy the second reacts to what he thinks Guy the first is thinking.
Front futures $4.594 down 2.1 cents.
The headline at Natural Gas Intelligence is:

Bears Barely Moving Following Stout EIA Storage Report
Natural gas futures dropped Thursday morning following the release of government storage figures that were somewhat on the high side of what traders were expecting.

The injection report of 114 Bcf was about 4 Bcf higher than market surveys and independent analyst projections. For the week ended May 23, the Energy Information Administration (EIA) reported an increase of 114 Bcf in its 10:30 a.m. EDT report. July futures fell to a low of $4.529 shortly after the number was released but by 10:45 a.m. July was at $4.587, down 2.8 cents from Wednesday's settlement.

Prior to the release of the data, analysts were looking for a build just above 110 Bcf. A Reuters survey of 24 traders and analysts revealed an increase of 110 Bcf with a range of 100 Bcf to 115 Bcf. United ICAP forecast a build of 113 Bcf and Bentek Energy's flow model anticipated an injection of 111 Bcf.

A New York floor trader remarked that with the reaction to the storage report "nothing has really changed. We are still in the range of $4.25 to $4.75. It's not an 'a-ha' moment. It was not a significant development."...MORE
From the Energy Information Administration:
Working gas in storage was 1,380 Bcf as of Friday, May 23, 2014, according to EIA estimates. This represents a net increase of 114 Bcf from the previous week. Stocks were 748 Bcf less than last year at this time and 922 Bcf below the 5-year average of 2,302 Bcf. In the East Region, stocks were 438 Bcf below the 5-year average following net injections of 64 Bcf. Stocks in the Producing Region were 374 Bcf below the 5-year average of 918 Bcf after a net injection of 31 Bcf. Stocks in the West Region were 110 Bcf below the 5-year average after a net addition of 19 Bcf. At 1,380 Bcf, total working gas is below the 5-year historical range...MORE
Working Gas in Underground Storage Compared with 5-Year Range

Junior Gold Miners Consider Cashing Out, Pursuing Medicinal Marijuana Opportunities

This is earlier in the cycle than expected. I mentioned the transmutations that small companies can go through back in 2008's "Chameleons on the Pink Sheets":
...A classic history would be a Vancouver "junior resource" company in 1979, after the collapse of the oil and gold markets became a solar deal in '81 , an Aloe Vera deal to the yuppies mid '80's, a biotech in '86 ("we're the next Amgen"or "A cure for AIDS"), then on to neutraceuticals or spas, Indian casinos, software, then the great "i", "e-" and ".com" gold rush. Someday I'll get around to checking if some lunatic scammer actually went with "".

The next group of parasites were the "homeland security" companies, then land deals. The "resource" scams never went away and became more prominent in 2002 after gold had moved off its $252 bear market low. We're in the Green boom (happy Earth day by the way) now, who knows what's next....
From Kitco:
With the mining sector proving to be ruthless in the junior mining space as a lack of capital in the industry continues, junior miners turned their heads to new opportunities, including the lucrative medical marijuana industry.
March saw several penny stocks jump as juniors essentially told the market they were looking at possibilities with medical marijuana.

The move was generally hiring consultants to explore the possibility in the field. However, in Canada, mining companies would have to go through the same steps as anyone to receive one of the few medical marijuana producers’ licenses. Only 12 have been handed out to date.

In a statement to Kitco News, Department of Health Canada said “to become a licensed producer, all applicants must meet all of the requirements of the new Marihuana for Medical Purposes Regulation, including obtaining the proper personal security clearances, meeting the physical security requirements for the cultivation and storage areas, and submitting a completed licensed producer application."  

Supreme Pharmaceuticals (TSX:CL), formerly metals mining company Supreme Resources, has applied to Health Canada for a “Marihuana for Medical Purposes Regulations” (MMRP) license.

The company recently completed the acquisition of a greenhouse complex for medical marijuana production on May 23, and said they will be able to begin production upon receipt of an MMRP license.

Satori Resources Inc. (TSXV:BUD) recently completed a strategic alliance with Jourdan Resources Inc. (TSXV:JOR) involving the Picnic Phosphate property in Quebec, which is focused on phosphate minerals for specialized agriculture and fertilizer....MORE
Still, it will be very difficult for anyone to top this morph:
Peak Oil Stalwart to Shutter Forum/News Site, Pursue Career as Astrologer

Quite the App: London Then and Now by Streetmuseum

From Vintage Everyday:
For most Londoners, the most common view they enjoy as they trudge to work is the back of another commuter's head but now, thanks to the Streetmuseum app, anyone traipsing through the capital's streets can step back in time to see what London looked like in the 19th and 20th century compared with today - all in the same image.

The pictures below are part of a series in which historic and contemporary images are blended together, allowing users to see just how much London's streets have been transformed.
An exterior shot of the completed Gloucester Road Station in 1868 and 2014. (Photo by Museum of London/Streetmuseum app)

A street seller of sherbert and water on the streets of London in 1893 and the same street in 2014. (Photo by Museum of London/Streetmuseum app)
The view north up Brick Lane in Spitalfields, close to the markets in 1957 and 2014. 
(Photo by Museum of London/Streetmuseum app)

Oil: It's Quiet Out There--BNP Paribas on the Lack of Volatility and When That Might Change

"Here at The Flatline Group we believe..."
Ahead of today's delayed EIA oil numbers here's something to chew on from FT Alphaville:

Desperately seeking volatility
The curious case of vanishing volatility deepens, with the latest installment coming by way of the oil market.
From Harry Tchilinguirian’s team at BNP Paribas, this is apparently what the death of volatility looks like:

And here’s the explainer:
More than mid-way through the second quarter, the oil market has indeed been mostly range-bound. And despite geopolitical flare-ups in Ukraine or Libya, implied oil volatility, be it on WTI or Brent, has moved lower still from the time of our recommendation. As volatility fell over the recent months, many in the market initiated long volatility positions in the hope of mean reversion higher, only to suffer from the cost of carry associated with time decay, while volatility itself continued to erode.

Front futures (Jul.) $102.80 up 8 cents. There is a very monotonic bacwardation out to the Dec . 2016's at $86.57.
Recent Climateer Investing headlines might suggest a method to the madness but alas it's just madness:
Cramer: "Charts point to potential $25 decline in oil"
It's Quiet Out There: "600 Days Without a 3% Daily Change"

Via FinViz as close to a flatline as you are likely to see in commodities:

Cramer: "Charts point to potential $25 decline in oil"

We haven't linked to Cramer in so long I'd forgotten about him.
On the topic of oil prices we're thinking down then up but we've been thinking that for a year. From our March 29, 2014 post:
Barron's Cover: "Here Comes $75 Oil" 
There is a lot of the stuff sloshing around.

Throw in the geopolitical angles (US/EU v. Russia; Saudia v. Persia) and a bit of downside protection may be in order.

Plus, we've been calling for it since $106-107, seven months ago and frankly I'm getting tired of the répétition, know what I'm sayin'?

Apparently contradicting the 'sloshing around' statement is the forward curve for WTI, currently in pretty steep backwardation from May 2014 at $101.67 to June 2016 at $84.73. That's a simplistic view however and does not account for above ground oil entangled in financing deals (Hi Izzy) and in situ storage. Remember July 4, 2008?

Oil began its historic decline from the previous day's all time high with the curve backwardated....
From CNBC:
The strength in oil prices may not be terribly long-lasting.

That's the broad takeaway from technical analysis provided by Carley Garner, author of "A Trader's First Book on Commodities."

Although Jim Cramer is first and foremost a fundamental investor, he often turns to technical analysis for insights, especially when an analyst has an impressive track record.

And Cramer says few analysts have been more accurate than Garner. "So, when Garner says to be cautious about crude, I take her seriously."

Part of Garner's skepticism involves geopolitical events, which often drive prices higher as investors fear a supply shortage. And at the moment, she believes that the price of oil has been buoyed by violence in Libya as well as the sabre rattling in Russia

Developments attracted buyers of crude oil as they often do. However, this time, they attracted way too many of them....MORE
The July futures settled in regular trade at $102.72 and were up a bit overnight.

Shale's Dirty Little Secret: "Shakeout Threatens Shale Patch as Frackers Go for Broke"

We have looked at the problem quite a few times especially from the natural gas angle and are pretty sure we will see $8.00 gas before we see $2.00 gas. For oil we are thinking down then up but WTI in particular has been quite stubborn about staying in a $90-$110 trading range.

From Bloomberg:
The U.S. shale patch is facing a shakeout as drillers struggle to keep pace with the relentless spending needed to get oil and gas out of the ground.

Shale debt has almost doubled over the last four years while revenue has gained just 5.6 percent, according to a Bloomberg News analysis of 61 shale drillers. A dozen of those wildcatters are spending at least 10 percent of their sales on interest compared with Exxon Mobil Corp.’s 0.1 percent.

“The list of companies that are financially stressed is considerable,” said Benjamin Dell, managing partner of Kimmeridge Energy, a New York-based alternative asset manager focused on energy. “Not everyone is going to survive. We’ve seen it before.”

Some investors are already bailing out. On May 23, Loews Corp. (L), the holding company run by New York’s Tisch family, said it is weighing the sale of HighMount Exploration & Production LLC, its oil and natural gas subsidiary, at a loss.

HighMount lost $20 million in the first three months of the year, after being unprofitable in 2013 and 2012, Loews said it its financial reports. As with much of the industry, HighMount has shifted its focus to oil after natural gas prices plunged and has struggled to find sites worth developing, company records show.
Mary Skafidas, a spokeswoman for Loews, declined comment.

In a measure of the shale industry’s financial burden, debt hit $163.6 billion in the first quarter, according to company records compiled by Bloomberg on 61 exploration and production companies that target oil and natural gas trapped in deep underground layers of rock. And companies including Forest Oil Corp. (FST), Goodrich Petroleum Corp. (GDP) and Quicksilver Resources Inc. (KWK) racked up interest expense of more than 20 percent.

Production Declines
Quicksilver acknowledges the company is over-leveraged, said David Erdman, a spokesman for Quicksilver. The company’s interest expense equaled almost 45 percent of revenue in the first quarter. “We have taken concrete measures to reduce debt,” he said.

Drillers are caught in a bind. They must keep borrowing to pay for exploration needed to offset the steep production declines typical of shale wells. At the same time, investors have been pushing companies to cut back. Spending tumbled at 26 of the 61 firms examined. For companies that can’t afford to keep drilling, less oil coming out means less money coming in, accelerating the financial tailspin.

Interest Expenses
“Interest expenses are rising,” said Virendra Chauhan, an oil analyst with Energy Aspects in London. “The risk for shale producers is that because of the production decline rates, you constantly have elevated capital expenditures.”

Chauhan wrote a report last year titled “The Other Tale of Shale” that showed interest expenses are gobbling up a growing share of revenue at 35 companies he studied. Interest expense for the 61 companies examined by Bloomberg totalled almost $2 billion in the first quarter, 4.1 percent of revenue, up from 2.3 percent four years ago.

The drilling spree boosted U.S. oil production to 8.4 million barrels a day, 16 percent more than a year ago and the highest since 1986. Growth has been driven by advances in horizontal drilling and hydraulic fracturing, or fracking, which unlocked crude and natural gas trapped in formations like North Dakota’s Bakken shale or the Marcellus in the U.S. northeast....MORE
Possibly also of interest:
"US Shale Gas Won't Last Ten Years"
This is an extreme view, probably promulgated to sell a book, but it highlights the problem with decline rates.
There are some plays which are uneconomic over the life of the well (more money in than out) but which are drilled anyway because of the quick cash flow which can be used as the basis for another round of debt or equity.
Stripped of all the hype, there are E&P companies that are basically Ponzi schemes but with a tail long enough that the miscreants will probably get away with it....
Natural Gas: The Astounding Production Decline Rates of Shale Wells

And one of the sharper analysts on oil:
Bernstein Research: "America’s shale oil bonanza won’t lead to an era of cheap energy"
Bernstein on Bakken Decline Rates and Estimated Ultimate Recovery (CLR; EOG; KOG; NFX)

And finally, something else to be aware of from Overthinking It via the Houston Chronicle and our 2009 post "Natural Gas: 'The Hubbert's Peak theory of rock n' roll' and 'Do these LNG export slowdowns change the balance?'":

Wednesday, May 28, 2014

Equities: 2014 as Analog to 2007

We are still in a bull market and markets being perverse we'll probably have a summer rally that drives the Sell in May folks insane. Their prayers for a correction to scale back in on go unanswered and in their madness to participate they put in the top.
Or something.

From Pension Partners:

Back in Time
Are you telling me that you built a time machine… out of a DeLorean?

Of course not. It’s 2014 and the environmentalists would go crazy. We built one out of a Tesla Model S and we’re headed back to…

May 2007. The economy is humming along and we’re over five years into an expansion that began in late 2001. The S&P 500 is hitting new bull market highs almost daily and investors are looking forward to a fifth consecutive year of gains. The credit markets are booming, with record demand for risky debt and high yield spreads hitting new lows.  There is some evidence of weakness in the housing market but this is surely a healthy development considering the incredible advance over the previous few years.

Given this backdrop, Investors are broadly optimistic, with Bulls outnumbering Bears in the Investors Intelligence poll by over 2.5 to 1. Also key to this bullishness is the new “low volatility regime,” with the VIX trading between 12 and 14 after crossing below 10 briefly in January and February. As long as volatility is low, Hedge Funds seem more than happy to increase leverage and net exposure to “boost returns,” creating a strong underlying bid beneath the market.
S&P 500, May 2007: What’s not to like?
While on the surface all is well in the markets, there is a subtle rotation going on underneath. Energy and Materials are the leading cyclical sectors while Consumer Discretionary and Financials are the weakest sectors. Together, this backdrop is classic late cycle behavior and not typically what you see in a strong economy....

HT: Barron's Read This, Spike That who highlights:
"The parallels between May 2007 and May 2014 are unmistakable, with broad market strength masking underlying weakness," according to the post. "That is not to say what happens next will play out in the same fashion this time around as it most certainly will not. But at the same time, to completely ignore what the market is telling us here would be foolish as well."