Saturday, October 31, 2015

Socialism, Capitalism and Bitcoin

A repost from January 2014:
Socialism: System where politicians become the wealthiest members of society
Capitalism: System where financiers become the most politically powerful members of society
From Dizzynomics:

The tendency towards cartelisation
When capitalism isn’t frequently saved from itself by socialism, it inevitably leads to the ‘cartel-isation’ and monopolisation of everything.
And once a monopoly is established nothing stops it from becoming as tyrannical as any “oppressive” government.
In short, both socialism and capitalism have the capacity to lead to tyranny. (A point well expressed by George Orwell’s Animal Farm).
The whole thing is a loop.
And it all comes down to the fact that there is no such thing as perfect competition in a world where information asymmetries can be purposefully created, where entry costs can be made prohibitive and where incumbents can manipulate the market clearing price thanks to inventories or excess capacity.
All wonderfully summarised by Lord Keynes on his Social Democracy blog on Friday:
Secondly, the glaring problem with the Austrian view of competition – with its emphasis on opposing alleged government obstacles to competition – is that mark-up pricing industries themselves, not only through the mark-up price but also through effective use of excess capacity and inventories, create severe market barriers to entry and destroys the Austrian view of market “freedom of entry.”

For, if a mark-up price remains generally fixed in relation to demand changes, and does not even rise when demand rises, how can there even exist any effective market signals to businesses to enter a new market with high prices when those high prices do not even appear in the first place? The answer is obviously that these “market signals” do not appear, and that the Austrian theory has already collapsed because most markets (which are mark-up/administered pricing markets) do not set prices in the way required by the theory....

See also:

Scale: "The Hidden Power Laws of Ecosystems"


As nature scales, complexity gives way to universal law.
Here’s how to cause a ruckus: Ask a bunch of naturalists to simplify the world. We usually think in terms of a web of complicated interactions among animals, plants, microbes, earth, wind, and fire—what Darwin called “the entangled bank.” Reducing the bank’s complexity to broad generalizations can seem dishonest.

So when Tony Ives, a theoretical ecologist at the University of Wisconsin, prodded his colleagues at the 2013 meeting of the Ecological Society of America by calling for a vote on whether they ought to seek out general laws, it probably wasn’t surprising that two-thirds of the room voted no.1
Despite the skepticism, the kinds of general laws made possible by simplification have remarkable predictive powers. They could let us calculate how many species there are in ecosystems that are too big to sample thoroughly, or how many will be lost after habitat destruction.

Perhaps because I started in biology after training in physics, I’m an ecologist who finds beauty in these general laws. In physics, the last thing you’d worry about are differences between one molecule of a gas and another. No one has a personal favorite electron. The ideal gas law relating pressure, volume, and temperature holds equally well for oxygen and nitrogen. Phase transitions between liquids and gases behave in the same way as the magnetization of certain metals.

Why shouldn’t an ecosystem be just as beautifully perfect as an ideal gas, and why can’t ecologists have as much predicting power as a physicist? The answers to these questions just might be “it is,” and “they can.” But only when viewed from a particular perspective.

In the 1980s, two ecologists, Jim Brown at the University of New Mexico and Brian Maurer at Brigham Young University, coined the term macroecology, which gave a name and intellectual home to researchers searching for emergent patterns in nature. Frustrated by the small scale of many ecological studies, macroecologists were looking for patterns and theories that could allow them to describe nature broadly in time and space.

Brown and Maurer had been influenced heavily by regularities in many ecological phenomena. One of these, called the species-area curve, was discovered back in the 19th century, and formalized in 1921. That curve emerged when naturalists counted the number of species (of plants, insects, mammals, and so on) found in plots laid out in backyards, savannahs, and forests. They discovered that the number of species increased with the area of the plot, as expected. But as the plot size kept increasing, the rate of increase in the number of species began to plateau. Even more remarkable, the same basic species-area curve was found regardless of the species or habitat. To put it mathematically, the curve followed a power law, in which the change in species number increased proportionally to the square root of the square root of the area.
The species-area curve: Early ecologists found patterns in the way species diversity increases with the area of habitat they sampled. This plot shows the number of different plant species found as habitat area is scaled up from a portion of one county in Great Britain, to the whole island. Both axes of the plot are on logarithmic scales, and on these axes a straight line is the signature of power law scaling. When plotted on regular, linear axes, the curve initially increases quickly, and then slows down at large areas.Copyright © 1995 Cambridge University Press.
Power laws are common in science, and are the defining feature of universality in physics. They describe the strength of magnets as temperature increases, earthquake frequency versus size, and city productivity as a function of population. For many ecologists, the species-area curve strikes a nerve. It suggests that at a large enough scale, the specific detail of an ecosystem—the “entangled bank” that lies so near and dear to the ecologist’s heart—simply doesn’t matter. The idiosyncrasies wash out, and ecological systems start to look surprisingly similar to a broad swathe of disparate systems in other sciences.
The universality of the species-area curve became abundantly clear in the models ecologists built to understand it. In 2001, an ecologist then at Princeton University, Steve Hubbell, developed a model based on the radical assumption that any selective differences (differences which give an evolutionary advantage or disadvantage) between individuals in the same part of a food chain are irrelevant. That means that individual outcomes are a kind of ecological roulette. Some species get lucky, ending up with broad, abundant distributions across space, while other species become relatively rare. Through a combination of analytical equations and computer simulations, his model, called the unified neutral theory of biodiversity, predicted a species-area curve that looked surprisingly realistic. Its success was built on this brutally simplified version of real ecosystems, with plants, animals, and organisms replaced by nearly identical statistical placeholders.

Another ecologist with physics training, John Harte, wondered if the species-area curve could be understood with even less ecological mechanism than the neutral theory supposed. Harte developed the maximum entropy theory of ecology, based around ideas taken from thermodynamics and information theory. Entropy is a measure of the disorder of a system, and is used in thermodynamics to calculate the most likely arrangement of identical gas molecules in a fixed volume. More disorder usually wins. By playing with the spatial distribution of species under certain constraints, Harte used maximum entropy theory to predict the number of tree species across the entire Western Ghats mountain range in India. Their estimate, published in Ecology Letters, fell within a respectable 10 percent of some 900 types of counted trees.2 Harte wasn’t considering the details of individual trees and their reproduction or seed dispersal—his work was purely driven by principles from the realm of information theory....MORE
If interested:
Financial Physics: "Power laws in finance"
Scientific American: "Can Math Beat Financial Markets?"
"The Philosophy of Complexity: Are Complex Systems Inherently Tyrannical?"
In the end the universe itself is inherently tyrannical.
You are not the boss.... 
Economists and Econophysics

The Bread We Eat Is Junk Food: Blame the Wheat

From the New York Times Magazine:

Bread Is Broken
Industrial production destroyed both the taste and the nutritional value of wheat. One scientist believes he can undo the damage.
On the morning of July 13, like most mornings, Stephen Jones’s laboratory in Mount Vernon, Wash., was suffused with the thick warm smell of baking bread. Jones walked me around the floor, explaining the layout. A long counter split the space down the middle. To the right was what Jones called ‘‘the science part,’’ a cluster of high-tech equipment designed to evaluate grain, flour and dough. Jones, who is 58 and stands a daunting 6 foot 5, calls to mind a lovably geeky high-school teacher. He wore dungarees, a plaid shirt, a baseball cap and a warm, slightly goofy smile. Two pairs of eyeglasses dangling from his neck jostled gently as he gesticulated, describing the esoteric gadgetry surrounding us. The 600-square-foot room, known as the Bread Lab, serves as a headquarters for Jones’s project to reinvent the most important food in history.

Jones pointed to a sleek red machine, roughly the length of three toasters. ‘‘This one’s an alveo­graph,’’ he said, smirking. ‘‘It blows bubbles.’’ If a globe of dough inflates to the size of a baseball without bursting, that means it has enough elasticity and extensibility to make a baguette or a rustic loaf. ‘‘But if it just goes fffft, it’s probably going to be at best a scone or cookie,’’ Jones said. Nearby was a squat device that looked like a photocopier — a farinograph, which assesses the strength of dough as it is mixed — and a cylindrical machine that tests raw grain for adequate levels of starch.
‘‘You put all three of those together, and you get a very good idea of what type of product that’s going to bake,’’ Jones said. ‘‘Then you come over here’’ — we moved to the left side of the room — ‘‘and you have everything that a craft baker would be familiar with.’’ There was a wooden baker’s bench, wicker nests for rising dough, a steam-injected hearth oven full of crispening boules, an assortment of hand-operated mills. And there was flour: flour piled in bowls, flour coating every available surface, flour kicked up into the air as we walked by.

What most people picture when they think of flour — that anonymous chalk-white powder from the supermarket — is anathema to Jones. Before the advent of industrial agriculture, Americans enjoyed a wide range of regional flours milled from equally diverse wheats, which in turn could be used to make breads that were astonish­ingly flavorful and nutritious. For nearly a century, however, America has grown wheat tailored to an industrial system designed to produce nutrient-poor flour and insipid, spongy breads soaked in preservatives. For the sake of profit and expediency, we forfeited pleasure and health. The Bread Lab’s mission is to make regional grain farming viable once more, by creating entirely new kinds of wheat that unite the taste and wholesomeness of their ancestors with the robustness of their modern counterparts.

Although regional grain economies have developed in California, North Carolina, Arizona and elsewhere, there are few people who match Jones’s fervor for wheat and none with an equally grand vision for its future. His lab was founded just three years ago, but it has already earned the respect of the country’s most celebrated bakers, like Chad Robertson of Tartine and Jeffrey Hamelman, the director of King Arthur Bakery. Dan Barber teamed up with Jones to develop ‘‘Barber wheat’’ for his restaurant Blue Hill at Stone Barns, which is ensconced in a working farm. Bread Lab breads have even made their way to the kitchens of the White House.
In recent months, the lab’s newfound popularity has caused a bit of an identity crisis. Its latest collaborator is the fast-casual Mexican chain Chipotle, which wants to use one of the lab’s regional wheats in its tortillas. Chipotle serves 800,000 tortillas around the country every day. ‘‘There are definitely issues of scale,’’ Jones says. ‘‘If you have Chipotle come in, how big does it get, and how quickly? Do we end up with a commodity by any other name?’’

Jones and wheat first met when he was a child. While learning to make bagels and marbled rye from his grandmother, Jones listened to tales of the wheat farms that her family had worked on in Poland. While studying agronomy at Chico State University in the late 1970s, Jones grew a modest five acres of wheat on a campus farm. ‘‘I fell in love with it as a crop,’’ he says. He would gaze upon his wheat every day, especially before sunrise and after sunset. ‘‘I don’t know if ‘spiritual’ is the right word, but it was very moving,’’ Jones says. ‘‘I would hear voices.’’ Around that time, he saw Terrence Malick’s 1978 film ‘‘Days of Heaven,’’ which is saturated with unhurried, sunset-lit shots of oceanic wheat fields in the Texas panhandle. ‘‘That did it for me,’’ he says.

A few years after college, Jones apprenticed with an Idaho wheat breeder named D.W. Sunderman, who taught him the craft of breeding: selectively cross-pollinating plants in order to create entirely new varieties. A head of wheat contains up to a hundred hermaphroditic flowers that usually pollinate themselves. Jones would choose a head on one wheat plant and pluck out all its pollen-producing anthers with tweezers, preventing self-pollination. Then, using plastic tubing or gauze, he would bind the neutered head to an intact one on a second wheat plant. Because wheat produces so many flowers, and has a gargantuan genome many times larger than our own, a single cross can yield a carnival of wildly different offspring. ‘‘He taught me how beautiful plant breeding could be,’’ Jones says of Sunderman, ‘‘and also the notion that if I wanted his job, I would have to get a Ph.D.’’

In 1991, Jones completed his doctorate in genetics at the University of California, Davis, and the U.S.D.A. hired him to study the wheat genome at Washington State University’s main campus in Pullman. Three years later, Jones landed a job as one of W.S.U.’s chief wheat breeders. At first, he was ecstatic, but disillusionment soon followed. The essence of plant breeding is innovation — the prospect of creating something truly novel. Yet in his first official role as a wheat breeder, Jones felt stifled. He was tasked with improving the yield and disease-resistance of wheat cultivars that had been designed for industrial milling. Prioritizing qualities the food industry considered superfluous was discouraged. When he tried breeding wheat with higher levels of nourishing minerals, like iron, zinc and magnesium, he was told those characteristics were unimportant. When he proposed working with a healthier wheat that still made excellent bread flour — albeit of a somewhat yellow tint — the university expressed no interest, he says.

Commodity wheats are defined in just three ways: hard (high in protein, which is good for bread) or soft (better for pastries); red (dark color and strong flavor) or white (pale and more delicate-tasting); and winter or spring, depending on when they are planted. ‘‘Hard red spring,’’ for example, is often used for bread; ‘‘soft white winter’’ is better for pastries. A vast majority of America’s 56 million acres of wheat grow in a belt stretching more than 1,000 miles from the Canadian border to Central Texas. Around half of the crop is exported, and most of what remains is funneled to feedlots for cattle or to giant mills and bread factories, which churn out all those bags of generic white flour and limp sandwich bread sleeved twice in plastic. This industrial system forces plant breeders to prioritize wheat kernels of highly specific sizes, colors and hardness.

By 2007, Jones had spent more than a decade begrudgingly breeding wheats for the commodities market. His opinion of industrial agriculture was no secret, however. As tensions mounted between Jones and the university, he made a bold decision: In order to escape the commodities system, he would give up wheat altogether. In 2008, he moved to W.S.U.’s western campus to become director of the W.S.U.-Mount Vernon Research Center, which helps small- and mid-scale farmers in the surrounding Skagit Valley, halfway between Seattle and Vancouver, grow about 80 different kinds of fruits, vegetables and flowers.

While preparing for the move, Jones thought he would end up working on cabbage for sauerkraut or cucumbers for pickling; he didn’t have a spiritual connection with those crops, but he liked them well enough. Driving around the area, how­ever, he was startled to discover one wheat field after another. Farmers told him it was crucial for crop rotations, which disrupt disease cycles and return nutrients to the soil. They harvested and sold the grain, but only to lose less money. There was no sense in trying to compete with giant growers in the nation’s wheat belt. What would happen, Jones wondered, if he developed unique varieties of wheat adapted to the Skagit’s cool, wet climate and extremely fertile soil? What if he could interest local millers and bakers in dealing primarily with Washington wheat? What if wheat, like wine, had terroir? After all, it used to.

The giant band of wheat that stripes the center of America is a byproduct of the industrial age. From the 18th century to the early 19th century, wheat was grown mainly near the coasts. During this time, immigrants and American emissaries introduced numerous varieties — Mediterranean, Purple Straw, Java, China, Pacific Bluestem — which breeders tinkered with, adapting them to various soils. All that preindustrial wheat was a living library of flavors: vanilla, honeysuckle, black pepper. Agricultural journals of the time noted the idiosyncrasies of wheat kernels — whether they were red and bearded, velvety or ‘‘plump, round, of a coffeelike form’’ — and distinguished wheats that produced ‘‘excellent’’ and ‘‘well-flavored’’ bread from those that yielded ‘‘inferior’’ loaves. Two wheats in particular, Red Fife and Turkey Red, became immensely popular in part because of their robust nuttiness.
As wheat spread from the coasts inward, so did flour mills. By 1840, 23,000 of them were scattered throughout the country. (Today there are around 200.)....MUCH MORE

"Kinder Morgan Could Fall Another 20% or More" (KMI)

If you are a shareholder you may have heard the nonsense from management "We are insulated from commodity prices" and"our revenue is fee-based" blah blah. Taint so.
And just to show I'm no hater-come-lately...

On August 11, 2014 we relayed the news of the roll-up of the partnerships into the corp. with the note, "more to come". And boy was there.

On August 12 FT Alphaville's David Keohane directed our attention to Bloomberg's Matt Levine and "Pipeline Giant Reverse-Engineers Itself $12 Billion" which we linked to in the less politely titled "Kinder Morgan Creates Money Out of Thin Air"

That same day Alphaville's Izabella Kaminska was even more blunt with "On the art of creating value from nothing". which we linked to in "Asking the Right Question About the Kinder Morgan Deal: Why Now? (KMI)"

Mr. Levine went on to other rides in the  parc d'attractions of high finance but Ms. Kaminska came back on the 18th with "Kinder Morgan, MLPs and the sell case" which we combined with the Barron's piece "Tax Breaks -- For Whom?", the Feb. 2014 Barron's piece "Kinder Morgan: Trouble in the Pipelines?" and KMI's response to the earlier Barron's piece into the linkwrap "The "Kinder Morgan Is a House of Cards" Theory and the Pros and Cons of Going Short (KMI)".

Good times.

The stock bounced around $41 the week the roll-up was announced and closed yesterday at $27.35 up 15 cents and up another nickel in after-hours trading.

For what it's worth it appears all the pair trade jockeying (short common/buy new issue prf.) with the new financing (link below) has been accomplished and the wee beasties should trade on fear/greed and fundamentals once again.

From Barron's, this week's feature story:
The country’s largest pipeline company faces pressure from lower commodity prices.

Wall Street has soured on once-hot master limited partnerships tied to pipelines and other energy infrastructure. So far this year, the benchmark Alerian MLP Index has fallen 29%. 

There are multiple reasons for the big drop, including disappointing earnings, reduced expectations for dividend growth amid depressed energy prices, and concerns that the MLP business model, which relies heavily on equity and debt sales to fund growth, is breaking down. 

All of these issues are affecting industry leader Kinder Morgan (ticker: KMI), which is down 36% this year to $27. 

The Houston-based company operates an 84,000-mile network of pipelines that transports a third of U.S. natural gas, as well as a significant amount of petroleum products. It produces oil from Texas fields, operates terminals that store coal and other commodities, and owns a large crude-oil pipeline in Canada. Its enterprise value (equity plus debt) is about $104 billion. 

Kinder Morgan shares still look richly priced and could fall to the low $20s as investors focus more on the company’s flagging results and high valuation, based on traditional financial measures, such as net income and earnings before interest, taxes, depreciation, and amortization (Ebitda), instead of its tempting 7.5% dividend yield. 

“Kinder Morgan is a capital-intensive, cyclical conglomerate with low to no growth and an overlevered balance sheet,” wrote Kevin Kaiser, an analyst with Hedgeye Risk Management, a Connecticut research firm, in a recent client note. “In our opinion, the MLP go-go days of valuing this company based upon its dividend are behind us. This market is smartening up and longs have a hard lesson to learn yet.”
While Kinder Morgan is a corporation, its financial reporting and dividend policy are like those of MLPs. This reflects the accounting used by two big MLPs that had been controlled by Kinder Morgan until the parent company bought them last year, greatly simplifying its structure. 

ANALYSTS WERE UNIMPRESSED with Kinder’s recent third-quarter earnings report. The company’s adjusted operating profits of $1.84 billion were below expectations and about 1% lower than those a year earlier. The decline came despite total capital spending projected at $4 billion for this year and a $3 billion pipeline acquisition earlier this year. The shares have fallen more than 10% since the news. 
Kinder Morgan increased its quarterly dividend by two cents, to 51 cents a share, leaving it 16% above its third-quarter 2014 level of 44 cents. But it retreated from its prior expectation of 10% growth in the dividend in 2016 by setting a new target range of 6% to 10%. 

The company has been pressured by low commodity prices, which hurt its oil-production business, and results were weaker in its big natural-gas pipeline segment, too. “While we are largely insulated from commodity-price impacts, due to our predominately take-or-pay supported cash flows, we are not totally immune,” said Chairman Rich Kinder in a statement.

The report prompted John Edwards, an MLP analyst and longtime Kinder bull at Credit Suisse, to cut his rating to Neutral from Outperform and lower his price target to $39 from $52. In a report, “Management Backs Off of Guidance for the First Time Ever,” he wrote that Kinder Morgan has “missed every quarter this year and is expected to come in below budget for the full year.” ...MUCH MORE

Friday, October 30, 2015

"Goals are for Losers. Passion is Bull$%&#"

HT upfront to Alpha Ideas (India) Mega Linkfest. I had not seen this in the 20+ months since Mr. Adams posted.

From Scott Adams blog:
Posted January 20th, 2014 @ 8:58pm in #General Nonsense 
Goals work great for simple situations. But the world is rarely simple these days. You don’t know what your career will look like in a year. You don’t know what the economy will be doing, or which new technologies will hit the scene. Your personal life is just as unpredictable. The future is a big ball of complexity if you look out far enough. And that means your odds of picking the one best goal for you are slim, and the odds of achieving it are even slimmer, because everything is a moving target. 
So instead of goals, try systems that improve your odds of success (however you define success) over time. Choose projects that improve your personal value no matter how the project itself does. Find systems for diet and fitness that replace willpower with simple knowledge. It’s easy to do. 
And while you’re at it, stop worrying about whether you have enough passion for success. Passion comes from success; success doesn’t come from passion. Passion is bull$#!$. You need energy, not passion. And you can increase your energy by using systems. 
See this quick slideshow on why goals are for losers, systems are for winners, and passion is bull#$!%. For a more complete explanation see my book, How to Fail at Almost Everything and Still Win Big....

and via SlideShare:

"Feeling Like You're an Expert Can Make You Closed-minded"


From the British Psychological Society's Research Digest:
"Not listening ..."
What happens to us as we accrue knowledge and experience, as we become experts in a field? Competence follows. Effortlessness follows (pdf). But certain downsides can follow too. We reported recently on how experts are vulnerable to an overclaiming error – falsely feeling familiar with things that seem true of a domain but aren’t. Now a new paper in the Journal of Experimental Social Psychology explores how feelings of expertise can lead us to be more dogmatic towards new ideas. 
Victor Ottati at Loyola University and his colleagues manipulated their participants (US residents, average age in their 30s) to feel relative experts or novices in a chosen field, through easy questions like “Who is the current President of the United States?” or tough ones like “Who was Nixon's initial Vice-President?” and through providing feedback to enforce the participants’ feelings of knowledge or ignorance. Those participants manipulated to feel more expert subsequently acted less open-minded toward the same topic, as judged by their responses to items such as “I am open to considering other political viewpoints.”  
People’s perceptions of their all-round expertise – provoked in the participants via an easy rather than a hard trivia quiz – also led them to display a close-mindedness in general, even though it was the participants who took the hard quiz who failed more, and reported feeling more insecure, irritable and negative – ingredients that are normally associated with close-mindedness. This isn’t to say that these emotional states didn’t have any effect, just that any effect was swamped by perceptions of expertise....MORE

In the past I have been less than respectful of the BPS:

Signposts: The Bull Market In Sand Is Over
...Having concluded that oil and gas were just a passing fad, this is what we were posting the month Emerge came public:
The Internet of Things: Huggies App Sends You a Tweet Whenever Your Kid Pees...
The Ethics of Torturing Robots
British Psychologists Bashing British Psychiatrists
Shaman               Witch Doctor
Psychologist            Psychiatrist

I so wish I were kidding.
But I think they are on to something with this research on expertise.

"At Long Last, SEC Provides Final Equity Crowdfunding Rules"

From Xconomy Boston:
Mom and Pop, you can now buy shares in the bakery down the street, or in your son’s girlfriend’s sister’s tech startup. That, in effect, was the message the U.S. Securities and Exchange Commission sent today, voting to give retail investors the right to buy shares in tiny private startups through so-called crowdfunding mechanisms. 
Crowdfunding, until now, has mainly helped small U.S. companies and individuals such as filmmakers and inventors raise cash through donations. A legion of websites, such as Kickstarter, Indiegogo, Experiment, RocketHub, and others, have hosted a vibrant exchange between fledgling companies and their well-wishers. Not many companies that reaped seed money from crowdsourced donations have gone on to raise institutional venture capital. One example is the citizen science firm uBiome. 
Crowdsourced fundraising has also generated some controversy. Glowing Plant, which accepted funds on Kickstarter in exchange for engineered seeds that grow into, yes, glowing houseplants, sparked an uproar over its spread of genetically modified organisms. 
The new crowdfunding rules, approved today by SEC commissioners 3 to 1, now make clear what has been somewhat murky: How tiny startups will be able to offer, not just small thank-you gifts to contributors like seeds or T-shirts, but equity to crowdsourced investors. It was the final piece of the law known as the JOBS Act—Jumpstart Our Business Startups—to fall into place. 
President Obama signed the JOBS Act into law in 2012, and it is widely considered a major catalyst for the three-year IPO boom that followed, thanks to its looser restrictions on taking companies public—the “IPO on-ramp” part of the bill. 
The JOBS Act also outlined a path forward for equity crowdfunding, with some rules such as a $1 million cap per year on any single company’s crowdfunding effort. But the SEC has been slow and deliberate—maddeningly so, to its critics—in making changes or creating more specific regulations, wanting to balance the needs of cash-hungry startups against the protection of so-called mom-and-pop investors who might see their life savings wiped out by bad bets.
Thanking her staff for its work, SEC chair Mary Jo White this morning called the effort “extraordinarily complex rulemaking.” 
“The SEC has done a nice job balancing adequate controls with nimbleness,” said Tobin Arthur, CEO of funding portal AngelMD, which has forged ahead with the crowdfunding of healthcare companies for a more specialized set of investors.
To those following the long process—more than three years since President Obama signed the JOBS Act, and two years since the SEC first drafted the proposed crowdfunding rules—much of what the SEC greenlighted today was not a surprise. 
For example, the JOBS Act language put a $1 million cap on the amount a company can raise within 12 months. It also placed a limit on what an investor can bet, based on his or her income and net worth, from a minimum investment of $2,000 up to a maximum of $100,000. Those caps did not change today, and they might constrain what kinds of startups seek crowdfunded cash in the future....MORE

Ackman's Pershing Square Makes It Into HSBC's Bottom 20 Rankings

From ValueWalk:
Bill Ackman’s Pershing Square hedge fund made an inauspicious appearance on an HSBC weekly hedge fund list in a ratings and performance reporting issue out today. Pershing Square cracked the bottom 20 worst performing list – and answers or questions that were or were not asked during Valeant Pharma due diligence might be at fault.
HSBC 10 30 Pershing Square

Ackman down in performance as SIRF and Citron administer a one-two puch

Pershing Square has never finished a year at the bottom of the HSBC performance ranking. For the hedge fund activist that in 2014 finished 8th on the list of best yearly performers, then delivering his best annual return in history, up 37.24 percent net to investors....

Climateer Line Of The Day: Pershing Square's Ackman Gets Trolled, Hard, Edition (VRX; HLF; TGT; BGP; JCP)

Tropical Cyclone Chapala Expected to Hit Yemen, Then Saudi Arabia

From Weather Underground:
Tropical Cyclone Chapala took advantage of the the warmest waters ever recorded in the Arabian Sea at this time of year to put on a remarkable burst of rapid intensification overnight. Chapala topped out for the time being as a top-end Category 4 storm with 155 mph winds (1-minute average) at 2 am EDT Friday, according to the Joint Typhoon Warning Center (JTWC). The India Meteorology Department (IMD), which has official responsibility for tropical cyclone warnings in the North Indian Ocean, put Chapala's intensity at 130 mph winds (3-minute average) with a central pressure of 942 mb at 8 am EDT Friday. This made Chapala the second strongest tropical cyclone on record in the Arabian Sea, behind Category 5 Cylcone Gonu of 2007, the only Category 5 storm ever recorded in the Arabian Sea. Gonu peaked at 165 mph winds (JTWC) or 146 mph (IMD) with a 920 mb pressure. The North Indian Ocean as a whole has seen five Category 5 storms in recorded history (with four of them occurring in the Bay of Bengal), so Chapala is the sixth strongest tropical cyclone ever observed in the North Indian Ocean....MORE
Here's the 5-day forecast map:

Tropical Cyclone Chapala

"Goldman Sachs: Dollar Could Hit Parity Versus Euro in 2015"

Angela Merkel dreams of this.
EUR/USD 1.10146.

From Barron's Focus on Funds:
Goldman Sachs currency strategists led by Robin Brooks reiterated that the greenback could hit to parity with the euro by the end of this year. 
After the European Central Bank kicked off its program to buy bonds (quantitative easing) earlier this year, Goldman’s team slashed their estimates for the euro/dollar in calling for  euro and dollar will trade at parity, one-to-one, in six months. 
Goldman’s currency call was aggressive, though the rationale behind it was (and is) mainstream: the Federal Reserve will begin to raise interest rates as the same time that the European Central Bank and the Bank of Japan embark on multi-year stimulus; the former strengthens the dollar, while the latter weakens other big currencies. 
A funny thing happened: the dollar has mostly traded sideways versus the euro since cresting in March at $1.05. The euro/dollar was $1.10 recently, having jumped as high as $1.15 in August. The currency pair was at around $1.26 a year ago. Flagging dollar strength in the intervening months came about as weak U.S. economic data and global market volatility made the Fed reluctant to raise interest rates....MORE

"Mark Twain's Connecticut Mansion Is Everything You'd Imagine and More"

From Curbed:

If someone were to ask you to picture what type of house Mark Twain might have owned in Connecticut in the late 19th century, your imagination would probably be pretty close to Twain's real life house, which exists in a state of exemplary preservation, as photographed recently by Imgur user Reacher. The atrium alone is to die for....MORE

How Automation and Big Data Affect Forecasting

This is our fourth or fifth post on Superforecasting. I promise I'll stop.
One of the gems in Abnormal Returns' Superforecasting link mania:

From Scientific American:
I’ve been hard on social science, even suggesting that “social science” is an oxymoron. I noted, however, that social science has enormous potential, especially when it combines “rigorous empiricism with a resistance to absolute answers.” 
The work of Philip Tetlock possesses these qualities, and it addresses a fundamental question: How predictable are social events? His early research, which assessed experts’ ability to foresee things like elections, economic collapses and wars, highlighted the difficulties of prediction. See, for example, how I cite him in a column on whether the public should defer to the judgment of scientific experts. 
Tetlock’s new book Superforecasting: The Art and Science of Prediction, co-written with journalist Dan Gardner, is much more upbeat. The book has already received raves from The Economist, Wall Street Journal, former Treasury Secretary Robert Rubin, psychologist Steven Pinker, Nobel laureate Daniel Kahneman and others.... 
...Horgan: Are you a believer in the power of Big Data to revolutionize the social sciences? Will social science ever be as precise and rigorous as physics? 
Tetlock: I'm not sure about "revolutionizing" social science, but Big Data will clearly make it possible to answer many categories of questions that were previously unanswerable. We now have massive databases on interpersonal relations (e.g. Facebook), search behavior (Google), consumer behavior (seemingly everywhere). Tangentially: Companies routinely do things to all of us that the human subjects review boards at universities would categorize as unconscionably unethical.  Either university review boards are ridiculously hypersensitive or Big Data firms are ridiculously insensitive. I think it is a mix. 
Horgan: Social theories and predictions can have an enormous impact on societies, as Marx’s impact on history demonstrates. Does this feedback factor contribute to the difficulty of social prediction? Is it possible to build models that take this factor into account?...MUCH MORE
We have a bit of a love/hate relationship with SciAm. For example, I still hold this against them:
"That the automobile has practically reached the limit of its development is suggested by the fact that during the past year no improvements of a radical nature have been introduced." 
-Scientific American, Jan. 2, 1909.
As for Tetlock, We dumped most of our links into Credit Suisse's Mauboussin: "Sharpening Your Forecasting Skills"

Yeah, I Got Your Disruptive Tech: Silicon Valley and Goldman Are Investing In Old Clothes

From Bloomberg:

Why Is Silicon Valley Pouring Millions of Dollars Into Old Clothes?
VCs and Wall Street have pumped $400 million into the online clothing resale business to beat back eBay and Amazon.
James Reinhart spent months trying to get somebody, anybody, to invest in his idea: an online clothing exchange for women and kids.  
He would rent a Zipcar and drive out to Boston's Route 128, a venture capital hot spot, with his pitch deck in hand. Then he'd fly to San Francisco to navigate Sand Hill's labyrinth of venture firms. 
The VCs shot him down 27 times, some of them laughing in his face. At one meeting, one of the firm's partners asked if the idea was to have women swap their panties. Reinhart, then a 30-year-old recent Harvard Business School graduate, shrugged it off. 
"I was just like, whatever, dude," said Reinhart. "If that's where your mind is at, we're clearly not going to do a deal." 
That was six years ago. Last month, Reinhart's secondhand fashion marketplace, ThredUp, raised an $81 million round of financing led by Goldman Sachs, bringing its total funding to more than $131 million. 
ThredUp isn't an outlier. There's a war brewing over the junk in people's closets, as investors funnel cash into the online clothing resale business, backing more than a dozen companies, each looking to capitalize on what they see as a weak spot for Amazon and even for resale leader eBay. 
Venture capital firms poured hundreds of millions of dollars into fashion resale in 2015; total funding over the past five years has blown past the $400 million mark. In January, online consignment shop Tradesy raised $30 million. By the end of April, vintage luxury reseller RealReal had raised $40 million and social commerce site Poshmark had taken in $25 million. 
European resale shop Vestiaire Collective scored a $37 million round in September. Then came Goldman's monster round for ThredUp, perhaps the most mainstream of the bunch.
"It's a category that's very much winner-take-all," said Reinhart. "VCs know that if they pick the winner, it'll have a long-term sustainable advantage." 
The list goes on. There's Vinted, a Lithuania-based clothing swapper. Threadflip's full-service consignment marketplace aims for the fashionista with little time. Rebagg deals only in designer handbags. Shop Hers is all about luxury. Vaunte touts the closets of fashion insiders. Snobswap partners with offline stores. Refashioner strives to curate unique items. Material Wrld trades gift cards for unwanted clothes....MORE

Climateer Line Of The Day: Pershing Square's Ackman Gets Trolled, Hard, Edition (VRX; HLF; TGT; BGP; JCP)

This is just brutal:

“I hope Bill Ackman has done more research on Valeant than he did on Herbalife, Target, Borders and JC Penny,”

-Alan Hoffman, executive vice president, global corporate affairs, Herbalife via BusinessWire

As Alinsky said:

Ridicule is man’s most potent weapon. It’s hard to counterattack ridicule, and it infuriates the opposition, which then reacts to your advantage...

#5, Rules for Radicals, Saul Alinsky

Pray For Elon Musk: SolarCity Drops 21% (SCTY)

On second thought, Elon can take care of himself. Instead, pray for the P.R. guy.
The headline at ReCharge is pretty funny:
SolarCity pivots to slower growth mode
I'm thinking Chanos is amused.

Oddly enough, following on the Enron post immediately below, here's our August 21 post, "SolarCity's CEO When Told Jim Chanos Is Shorting His Stock: "First I've ever heard of the guy" (SCTY)":
Oh dear.
Oh dear, oh dear, oh dear.
SolarCity's CEO is an ahistorical idot. 
I mean we're all idots from time to time but most of us at least try to conceal our idot-hood from the freakin' media!...
That was followed the next day by Chanos' version of turnabout-is-fair-play:

SolarCity: Jim Chanos On Elon Who? (SCTY)
A couple weeks ago when I used the term 'Junior Forensic Analyst school'* I was actually thinking of Chanos as the prototypical forensic analyst. Huh. 
That said, I think he is dissimulating on his reasons for this short. It's not the 'subprime' that he mentions in the clip below, he is smart enough to know the ins and outs of SolarCity's financial statements to know that's not the case. 
Nor is it the 'falling cost of solar' argument he makes. 
I think that is the hedge fund equivalent of the magicians misdirection move. 
Rather it is pure and simple a numbers game: 
1) the cost-of-funds/net interest margin problem that can come up when you're borrowing short and lending long, exacerbated by the potential for rising rates and potential credit downgrades of SCTY and/or the paper making up the ABS'. 
2) Current negative cash flows: $138 mil on an operating basis and total free cash flow of negative $1.39 Billion. Per quarter. 
3) A business model that doesn't even start to work without the assumption that grid electricity prices escalate at 4.8% per year for the next 20 years. 
Even in California the increases since 2008 have 'only' been 3.5%/yr. and 2.17%/yr. since 1990.
Do click through for the video, it too is pretty funny.
*Referencing this post: "Elon Musk's SpaceX Has Been Buying Up Elon Musk's SolarCity's Bonds (SCTY)"

Here's the latest from The Street:
SolarCity Corp (SCTY) Earnings Report: Q3 2015 Conference Call Transcript
Suffice to say the numbers are awful and the market is not buying the excuses.
Here's the 10Q.

More to come.
The stock is currently down $7.90 (21.00%) at $30.12.
Here's the chart action for the last 10 months. The last print is way over in the bottom right corner:
SCTY SolarCity Corporation daily Stock Chart

Thursday, October 29, 2015

"Enron Revisited: Highlights from Bear Stearns Research"

We have quite a few posts on Enron but one of my faves is from the Enron emails. From our January 2009 post "Fun With Enron Emails":
Date: 01/09/2002 10:26 AM
To:, Randy G. Kruger Jr.@ANDERSEN WO,, 
Subject: Lunch
OK you slackers (excluding Shaw), I'll give you another chance to respond.
Lunch this week or next, let me know what's good. If meeting after work is
better for you, let me know. Certainly all of you can stop shredding
documents for 5 minutes to respond.

*******************Internet Email Confidentiality Footer*******************
Both Andrews-Kurth and Baker & McKenzie were Enron attorneys, Andersen was the accountant.
Good yucks, huh?

From the CFA Institute's Enterprising Investor blog:
A fantastic piece of financial market history resurfaced this week. 
Somebody found a 26 January 2001 research note on Enron from Bear Stearns and posted it on Wall Street Oasis (WSO). 
The Bear Stearns team initiates coverage on the stock (then trading at 79 3/4) with an “Attractive rating” noting the “unlimited potential in broadband services” as just one of many opportunities. 
So there’s no way you can’t keep reading, right? I couldn’t help myself either.First, you have to just take a second and think about what this company was to the world at the time. Today, it’s hard to remember Enron as anything but a classic example of hubris and fraud. But the market didn’t always know that. 
“Already an established leader in the natural gas industry, Enron is moving rapidly — through revolutionary communications systems and interfaces — to become the world’s preeminent energy and commodities marketer, high-density Internet distributor, and distributed energy leader. We believe that Enron should be compared to leading global companies like GE, Citigroup, Nokia, Microsoft, and Intel, and that its valuation reflects this eminence.” [All emphasis mine.] 
And take care to note the trajectory that the market saw. Frauds can seem like the hottest ticket around. Remember: People called up Bernie Madoff asking to invest with him and he turned a lot of them down. In the market’s perception, Enron was on fire: 
“$98 PRICE TARGET. Our Attractive rating and 12-month price target reflect Enron’s highly successful existing businesses, customer relationships and contractual agreements; its advanced online systems and business models; and its valuation relative to potential financial results (based on both a conservative DCF and comparables analysis).” 
Just a quick tangent here. When I was a kid, my dad taught me the meaning of the term “conservative basis” as it’s commonly used on Wall Street....MUCH MORE
One other post that stands out is November 2007's "Wall Street Learned the Lessons of Enron (Unfortunately)":

By now, Climateer Investing's loyal and long-suffering readers know of my morbid fascination with stock frauds in general, and Enron in particular. One of the earliest* looks at this perversion of capitalism and markets was:

Is Enron Overpriced?

It's in a bunch of complex businesses.
Its financial statements are nearly impenetrable.
So why is Enron trading at such a huge multiple?

By Bethany McLean
March 5, 2001
NEW YORK (FORTUNE) -- In Hollywood parlance, the "It Girl" is someone who commands the spotlight at any given moment -- you know, like Jennifer Lopez or Kate Hudson. Wall Street is a far less glitzy place, but there's still such a thing as an "It Stock." Right now, that title belongs to Enron, the Houston energy giant. While tech stocks were bombing at the box office last year, fans couldn't get enough of Enron, whose shares returned 89%. By almost every measure, the company turned in a virtuoso performance: Earnings increased 25%, and revenues more than doubled, to over $100 billion. Not surprisingly, the critics are gushing. "Enron has built unique and, in our view, extraordinary franchises in several business units in very large markets," says Goldman Sachs analyst David Fleischer....MORE
Now Bethany is back with

Uh-oh. It's Enron all over again

November 14 2007

(Fortune Magazine) -- Start with the headlines about off-balance-sheet entities known as structured investment vehicles, or SIVs (or sieves, as some wags are calling them). As Gertrude Stein never said, an off-balance-sheet vehicle is an off-balance-sheet vehicle is an off-balance-sheet vehicle.

Just as Enron's off-balance-sheet vehicles were propping up its stock price by camouflaging the company's real financial results, so SIVs were inflating the credit market by providing demand for the complex securities created out of mortgages and loans used to finance buyouts....

That was four months before JPM grabbed BSC and ten months before Lehman collapsed.

Markets Fall Like Cherry Blossoms in Gentle Spring Rain

Stocks close generally mournful and reflective.

Inauspicious update below.

From ZeroHedge:

Eventually The Weight Becomes Too Much To Bear

The “equal-weight” S&P 500 has dropped to near 3-year lows versus the cap-weighted version. Previous such events under similar conditions occurred at inauspicious times. 
Continuing with the impromptu weekly theme regarding the relatively “thin” nature of the recent stock rally, today we take a look inside the S&P 500. Like yesterday’s post on the consumer discretionary sector, this one examines the “equal-weight version of the index versus the traditional cap-weighted version. Whereas the performance of the cap-weighted index can be subject to undue influence by the very largest components, a look at the equal-weight version can give us an idea of the health of the broad swathe of stocks within the index. 
While the relative under-performance on the part of the equal-weight S&P 500 (as judged by the Rydex Equal-Weight S&P 500 ETF, RSP) may not be as egregious as in the consumer discretionary sector, it is still somewhat alarming. Despite the cap-weighted S&P 500 (as judged by the S&P 500 SPDR ETF, SPY) being reasonably close to its all-time highs again, the equal-weight:cap-weight ratio has dropped to near 3-year lows. Considering the context, the RSP:SPY ratio is at levels only seen just prior to substantial declines in July and back in 2007. 
 By “considering the context”, we mean that the cap-weighted S&P 500 is less than 3% from its all-time high. The only months, historically, that have seen the equal-weight:cap-weight (RSP:SPY) ratio at a 2-year low under those circumstances are shown below. Obviously, these did not mark the best months to be buying stocks.
  •  September-November 2007
  • July 2015
  • October 2015
Again, like we have mentioned throughout the week, this situation means that the inordinate bulk of the lifting during the recent rally is being done by the biggest of stocks. It does not necessarily mean that the rest of the stocks are falling or doing poorly. It just means that they’re not doing their fair share. As it turns out, on an equal-weighted basis, the indices have basically been drifting sideways during the most recent few weeks while the biggest stocks have been rallying smartly. 
So is this a big deal? Well, in July it was. And in the fall of 2007 it was. Does this mean the market is on the verge of another collapse? Not necessarily. It doesn’t even mean that the rally cannot continue, for a time. It does mean that if one wants to participate on the long side, they are likely better suited being in those relatively few stocks or areas that are carrying the market at the moment.
Invest in Kirin
Mindfulness overrated
Sensei insensate 

Okay, the pseudo Japanese schtick is hard to maintain, much less in haiku format, so I'll outsource. Here's the inspiration for this iteration, Alphaville's Joseph Cotterill from a few years ago:

One of the following is an autumnal haiku composed on Twitter by Herman van Rompuy, President of the European Council. But which is it?
The night has fallen
The bare branches can be seen
Even more lonely

A season of mists
And of mellow fruitfulness
But not you; you’re Greek

Wet leaves, brown, rotting
Keep bloody slipping on them
Look, Spain metaphor
One more, in honor of our link source, this time from Cassandra Does Tokyo:


Got any Gold? I do...
Glass is always half-empty
The game's frickin' rigged!

That Time Voltaire Decided To Game the Lottery and Make a Small Fortune

I thought we had posted a version of this story a couple years ago but a quick search of the blog says non.

From Damn Interesting:

François-Marie Arouet knew how to get into trouble. After a very public scuffle with a nobleman nearly ended in a duel, the young playwright was exiled from Paris, the city where his plays were only just coming into fashion. He lived in dreary England for two whole years before slinking back to France, where he lived in the house of a pharmacist. There he experimented with various potions and poultices, but nothing would cure the vague sense of impotence and dread that dogged him.

Finally in 1729 the gates of Paris were opened to Arouet again, but he was still ill-at-ease. At a dinner party held by the chemist Charles du Fay, Arouet, better known by his pen-name Voltaire, found the cure he had been looking for. He met a brilliant mathematician called Charles Marie De La Condamine, who promised a panacea better than any Voltaire had found at his pharmacist.

It wasn’t medicine—it was money. Condamine had a plan that would make both him and Voltaire more money than he could ever scratch together by writing plays or poems, enough money to allow Voltaire to never have to worry about money again. He would be free to live how he wanted and write what he wanted. The plan was simple. Condamine planned to outsmart luck herself. He was going to arrange to win the lottery.

At the time the French crown secured much of its revenue by issuing government bonds. In 1727, in order to save money, the state cut the bonds’ interest rate. The market value of these bonds plummeted, and the market became wary of French credit. The French state was left without an easy way of raising money.

A Deputy Finance Minister named Le Pelletier-Desforts had a great idea that would let the state drive up the prices of the bad bonds and so restore faith in the government’s finances. In his scheme owners of bad bonds could buy a lottery ticket. If your ticket won, you would win back the face value of your original bond—plus an extra jackpot of 500,000 livres. This was a lot of money. While no comparison to modern-day currency is possible, an annual income of only 30,000 livres would make a person very, very rich. 500,000 livres was enough to make a person rich for the rest of their lives.

French citizens were allowed to buy a ticket for every bond they owned at 1/1000th of the bond’s value. A ticket for a 1,000 livre bond cost one livre, while a ticket for a 10,000 livre bond cost ten livres. But both tickets had equal chances of winning the 500,000 livre jackpot. Condamine realized that a group of people could buy up a lot of cut-price bonds, split them into tiny parcels of 1,000 livres, buy up cheap lottery tickets, and thus easily win the huge jackpot.

Voltaire and Condamine started a syndicate to do just that. But once they got the people, the money and the bonds together, they faced a final problem. Lottery tickets were issued only from a very small number of notaries, and the notary issuing stacks of lottery tickets to shifty young Voltaire would almost certainly guess what was going on, and give the syndicate away before any money could be won. Voltaire had to develop an ‘understanding’ with a notary before the plan could proceed. Once this was done, the young men were ready to get rich.

Every month Voltaire would go to the Châtelet to visit his notary, and walk away with reams of tickets. By tradition people inscribed the backs of their tickets with good-luck phrases. Voltaire’s were mocking. “Here’s to the good idea of M.L.C. [Marie De La Condamine]!” “Long live M. Pelletier-Desforts!” He signed them with a series of assumed names, getting increasingly more absurd as the scheme went on. Every month on the 8th when the tickets were drawn, the syndicate would be about a million livres richer, according to Voltaire’s later estimate....MORE