Wednesday, November 30, 2016

Questions America Wants Answered: "What does a £15,000 whisky taste like?"

From the EveningStandard:

Ashley Coates asks some of the lucky few that have tried the 1972 release from Balvenie

 The Balvenie DCS Compendium Chapter II
They stare down at you from glass cabinets in London’s high-end retailers, seemingly untouchable. But what does a whisky in this category actually taste like, and how does it get to be so expensive?
To answer these questions, I looked to some of the experts in the business, all of which have been given the chance to sample the recently released 1972 Balvenie from the DCS Compendium Chapter II. 

Balvenie does not specialise in ultra-rare whiskies. The Speyside distillery offers some comparatively reasonably priced and popular variations, the 12-Year Doublewood, the 14-year Caribbean Cask and the 17-Year Doublewood being amongst the best known and most appreciated.

But this year was a special one for Balvenie. It’s the 53rd year in which its Malt Master, David Charles Stewart MBE, has been creating world-famous whiskies for the firm. Having been appointed Master Distiller to Balvenie back in 1974, he’s the longest serving master distiller in the whisky industry. The DCS Compendium has been made to honour 50 years in the business and is an “unconventional handover note” from David, who said at the time of the release: “I had to leaf through ledgers, search computer records, and had to hop, quite literally, barrel over barrel to seek them out in the various warehouses”. There will be five 'chapters' in the compendium, each consisting of five rare whiskies, released over five years....MUCH MORE

Kremlin Unsure How to Take Erdogan's Vow to Topple Assad

The precedent is already established, the one used in "Reply of the Zaporozhian Cossacks", see below.

The problem with what Erdoğan is doing is it risks drawing NATO into a war with Syria and their ally Russia.
From al-Monitor:
A top Russian diplomat rebuked Turkey’s president over his comments on Syria today, saying they contradict international agreements on the war-wracked country. Russian Deputy Foreign Minister Mikhail Bogdanov told Russian news agencies Nov. 30 that his government was puzzled by Recep Tayyip Erdogan’s assertion a day earlier that Turkey was in Syria for no reason other than to topple President Bashar al-Assad. "We are there to bring justice. We are there to end the rule of the cruel Assad, who has been spreading state terror," Erdogan said.

His words flew in the face of Turkey’s earlier claims that it had sent its troops into northern Syria to battle the Islamic State and the Syrian Kurdish militia known as the People’s Protection Units: It's against all international agreements that Turkey is party to “if Erdogan plans to wage war,” on Assad, Bogdanov said.

In separate remarks, Kremlin spokesman Dmitry Peskov told reporters, "It is a very serious statement and one which differs from previous ones and with our understanding of the situation. We hope that our Turkish partners will provide us with some kind of explanation about this."
There has not been any yet.

Russia and Iran are the Syrian regime's chief allies in the war against opposition rebels who are, in turn, supported by Turkey, various Gulf states and in part by the CIA. But in recent months Turkey has signaled willingness to rein in the one group that poses the biggest threat to Assad’s rule — the al-Qaeda-linked Jabhat al-Nusra, which now calls itself Jabhat Fatah al-Sham. The shift followed a frenzied campaign by Turkey to woo back Russia after the pair fell out over Turkey’s downing of a Russian jet in November last year.

Analysts reckon Erdogan’s latest spate of hawkishness has more to do with placating his own Islamist base than with yet another U-turn in Turkey’s thus far disastrous Syria policy....MORE
And back to the Cossacks. A couple weeks ago we posted "Little Has Changed Between Turkey, Russia Despite Reconciliation" with this introduction:
Whenever I think about Turkish-Russian relations I think of this painting:

That's "Reply of the Zaporozhian Cossacks" by Repin, hanging in the State Russian Museum, St. Petersburg.

As the story goes, in 1676 the Turkish Sultan, despite being beaten by the Cossacks when he tried to invade what is now southern Ukraine, demanded these guys surrender and submit to Turkish rule.

As can be seen, the Cossacks thought this was the funniest thing they had ever heard and wrote a letter in response.
A very profane, very defiant, very vulgar, very contemptuous letter.

These old boys just cracked themselves up with their letter.
And that's what I think of when I think of Russians and Turks.

"'Sheer number of unknowns' deters private equity from farming"
From Agrimoney:
Private equity firms have largely stayed away from agriculture due to the risks the sector presents, said David Gray, partner at Altima Partners, an investment manager.
"PE firms don't like commodity risk," said Mr Gray.
Such investors had tended to shy away from the production side of the agriculture sector and focus instead on "value add" – that is, the industries processing raw farm commodities into higher value products.
'Number of unknowns'
Besides an apparent lack of liquidity and visibility of fund drivers, uncertainty surrounding the sector kept firms away.
"There is too much uncertainty involving weather and crop," said Mr Gray at the AgriRisk Forum in London. "They don't know what the weather is going to be like or what the production figures will be."...MORE
A couple years ago one private equity fund, ACM was raising $250 million but I don't know if it has deployed all the money. The last time I looked they were growing organic blueberries and hazelnuts but on the one hand if you put that much loot into blueberries you'd probably have antitrust problems and on the other, the international hazelnut cartel is facing declines in the Gin Gimlet end-market and Nutella is getting vertically integrated in their sourcing.
As usual, apologies to the Grant Wood Estate and the Art Institute of Chicago for the image at the top of the post.  

OPEC Deal Agreement Table

Discerning reader may have noticed a lack of oil commentary the last week or so.
Our thinking was pretty simple (simplistic?), how the heck would our readers trade this mess:

When confronted with such things we default to Lao Tzu on Derivatives:

Those who know, do not speak.
Those who speak, do not know.
-Ch. 56, Tao Te Ching

Anyway....until the Dec. 9 OPEC/NOPEC meeting we're going to keep most of our thinking to ourselves although I will point out that WTI's failure to clear $50 is telling, $49.21 last.

For now the two most timely and topical commentators are probably the FT's Neil Hume and Reuters' John Kemp, from whom we lift the table:

"Can Uber Ever Deliver? Part One – Understanding Uber’s Bleak Operating Economics"

As mentioned in the post immediately below, Naked Capitalism is doing a fundraiser. This is part of the effort.
From Naked Capitalism:
This is Naked Capitalism’s special fundraiser, to fight a McCarthtyite attack against this site and 200 others by funding legal expenses and other site support. For more background on how the Washington Post smeared Naked Capitalism along with other established, well-regarded independent news sites, and why this is such a dangerous development, see this article by Ben Norton and Greenwald and this piece by Matt Taibbi. Our post gives more detail on how we plan to fight back. 23 donors have already supported this campaign. Please join us and participate via our Tip Jar, which shows how to give via check, credit card, debit card, or PayPal.

Yves here. By virtue of steamrolling local taxi operations in cities all over the world, combined with cultivating cheerleaders in the business press and among Silicon Valley libertarians, Uber has managed to create an image of inevitability and invincibility. How much is hype and how much is real?

As transportation industry expert Hubert Horan will demonstrate in his four-part series, Uber has greatly oversold its case. There are no grounds for believing that Uber will ever be profitable, let alone justify its lofty valuation, absent perhaps the widespread implementation of driverless cars. Lambert has started digging into that issue, and his posts on that topic have consistently found that the technology would be vastly more difficult to develop and implement that its boosters acknowledge, would require substantial upgrading in roads, may never be viable in adverse weather conditions (snow and rain) and is least likely to be implemented in cities, which present far more daunting design demands that long-distance transport on highways.

Tellingly, earlier this month, Bloomberg reported that JP Morgan and Deutsche Bank turned down the “opportunity” to sell Uber shares to high-net-worth individuals. The reason? The taxi ride company provided 290 pages of verbiage, but would not provide its net income or even annual revenues.

By Hubert Horan, who has 40 years of experience in the management and regulation of transportation companies (primarily airlines). Horan has no financial links with any urban car service industry competitors, investors or regulators, or any firms that work on behalf of industry participants.

Uber is currently the most highly valued private company in the world. Its primarily Silicon Valley-based investors have a achieved a venture capital valuation of $69 billion based on direct investment of over $13 billion. Uber hopes to earn billions in returns for those investors out of an urban car service industry that historically had razor-thin margins producing a commodity product. Although the industry has been competitively fragmented and structurally stable for over a century, Uber has been aggressively pursuing global industry dominance, in the belief that the industry has been radically transformed into a “winner-take-all” market.

This is the first of a series of articles addressing the question of whether Uber’s pursuit of global industry dominance would actually improve the efficiency of the urban car service industry and improve overall economic welfare.

For Uber (or any other radical industry restructuring) to be welfare enhancing, it would have to clearly demonstrate:
The ability to earn sustainable profits in competitive markets large enough to provide attractive returns on its invested capital
The ability to provide service at significantly lower cost, or the ability to produce much higher quality service at similar costs
That it has created new sources of sustainable competitive advantages through major product redesigns and technology/process innovations that incumbent producers could not readily match, and
Evidence that the newly-dominant company will have strong incentive to pass on a significant share of those efficiency gains to consumers.
Unlike most startups, Uber did not enter the industry in pursuit of a significant market share, but was explicitly working to drive incumbents out of business and achieve global industry dominance. Uber’s huge valuation was always predicated on the dramatic growth towards global dominance. Thus if Uber’s valuation and industry dominance were to be welfare enhancing, Uber’s efficiency and competitive advantages would need to be overwhelming, and there would need to be clear evidence of Uber’s ability to generate large profits and consumer welfare benefits out of these advantages.

While most media coverage focused on isolated Uber product attributes, or its corporate style and image, this series will focus on the overall economics of Uber, using the approaches that outsiders examining industry competitive dynamics or investment opportunities typically would. This first article will present evidence on Uber’s profitability, while subsequent pieces will present evidence about cost efficiency, competitive advantage and the other issues critical to the larger economic welfare question.

Uber Has Operating Losses of $2 Billion a Year, More Than Any Startup in History
Published financial data shows that Uber is losing more money than any startup in history and that its ability to capture customers and drivers from incumbent operators is entirely due to $2 billion in annual investor subsidies. The vast majority of media coverage presumes Uber is following the path of prominent digitally-based startups whose large initial losses transformed into strong profits within a few years.

This presumption is contradicted by Uber’s actual financial results, which show no meaningful margin improvement through 2015 while the limited margin improvements achieved in 2016 can be entirely explained by Uber-imposed cutbacks to driver compensation. It is also contradicted by the fact that Uber lacks the major scale and network economies that allowed digitally-based startups to achieve rapid margin improvement.

As a private company, Uber is not required to publish financial statements, and financial statements disseminated privately are not required to be audited in accordance with generally accepted accounting principles (GAAP) or satisfy the SEC’s reporting standards for public companies.

The financial tables below are based on private financial statements that Uber shared with investors that were published in the financial press on three separate occasions. The first set included data for 2012, 2013 and the first half of 2014, although only EBITAR (before interest, taxes, depreciation and amortization) contribution was shown, not the true (GAAP) profit that publically traded companies report.[1] The second set included tables of GAAP profit data for full year 2014 and the first half of 2015;[2] the third set included summary EBITAR contribution data for the first half of 2016.[3] There has been no public report of results for the fourth quarter of 2015.

Exhibit 1 summarizes data from 2013 through the first half of 2015. Drivers retained 83% of passenger payments (fares plus tips) which must cover the cost of vehicle ownership, insurance and maintenance, fuel, credit card and license fees as well as health insurance and take home pay; the balance is Uber’s total revenue. Exhibit 2 shows the GAAP results for the full year ending September 2015 based on the published numbers and an estimated quarterly split of published 2nd half 2014 results. Exhibit 3 compares first half 2016 results to 2014-15 results. There is no simple relationship between EBITAR contribution and GAAP profitability and even publically traded companies have wide leeway as to what expenses can be excluded from interim contribution measures such as EBITAR.
As shown in Exhibit 2, for the year ending September 2015, Uber had GAAP losses of $2 billion on revenue of $1.4 billion, a negative 143% profit margin. Thus Uber’s current operations depend on $2 billion in subsidies, funded out of the $13 billion in cash its investors have provided.
Uber passengers were paying only 41% of the actual cost of their trips; Uber was using these massive subsidies to undercut the fares and provide more capacity than the competitors who had to cover 100% of their costs out of passenger fares.

Many other tech startups lost money as they pursued growth and market share, but losses of this magnitude are unprecedented; in its worst-ever four quarters, in 2000, Amazon had a negative 50% margin, losing $1.4 billion on $2.8 billion in revenue, and the company responded by firing more than 15 percent of its workforce.[4] 2015 was Uber’s fifth year of operations; at that point in its history Facebook was achieving 25% profit margins.[5]

No Evidence of the Rapid Margin Improvement That Drove Other Tech Startups to Profitability
There is no evidence that Uber’s rapid growth is driving the rapid margin improvements achieved by other prominent tech startups as they “grew into profitability.”...

Rolling Stone Slams Washington Post Over Fake News Story

From Rolling Stone:

The 'Washington Post' 'Blacklist' Story Is Shameful and Disgusting
The capital's paper of record crashes legacy media on an iceberg
Last week, a technology reporter for the Washington Post named Craig Timberg ran an incredible story. It has no analog that I can think of in modern times. Headlined "Russian propaganda effort helped spread 'fake news' during election, experts say," the piece promotes the work of a shadowy group that smears some 200 alternative news outlets as either knowing or unwitting agents of a foreign power, including popular sites like Truthdig and Naked Capitalism.

The thrust of Timberg's astonishingly lazy report is that a Russian intelligence operation of some kind was behind the publication of a "hurricane" of false news reports during the election season, in particular stories harmful to Hillary Clinton. The piece referenced those 200 websites as "routine peddlers of Russian propaganda."

The piece relied on what it claimed were "two teams of independent researchers," but the citing of a report by the longtime anticommunist Foreign Policy Research Institute was really window dressing.
The meat of the story relied on a report by unnamed analysts from a single mysterious "organization" called PropOrNot – we don't know if it's one person or, as it claims, over 30 – a "group" that seems to have been in existence for just a few months.

It was PropOrNot's report that identified what it calls "the list" of 200 offending sites. Outlets as diverse as, and the Ron Paul Institute were described as either knowingly directed by Russian intelligence, or "useful idiots" who unwittingly did the bidding of foreign masters.

Forget that the Post offered no information about the "PropOrNot" group beyond that they were "a collection of researchers with foreign policy, military and technology backgrounds."...MORE
File under: 2016

We made mention of the slime on Naked Capitalism in last weekend's "Why the FT's Izabella Kaminska Won't Be Invited to the Andreessen-Horowitz Christmas Party, Redux".

NC is now raising funds to lawyer-up, see their Nov. 29 post "We’re Under Attack" if interested..

The Big Questions We'd Better Figure Out, Part 2: Algorithmic Discrimination and Empathy

Following up on yesterday's "The Big Questions We'd Better Figure Out, Part 1: How Do We Humanize The Algorithms That Will Rule Us?" we take a look at Ms. Kaminska's "Algorithmic Discrimination."

There must be something in the air with the empathy meme and we caught it ourselves a few weeks ago in "Short Selling Prerequisite: Empathy (and Charlie Munger quotes)" which riffed on the fact that your equity short book works better if you understand (have empathy for) what is driving the longs.

Then this week both the New Yorker and the New York Times had articles on empathy and tech: "Silicon Valley Has an Empathy Vacuum" and "Is ‘Empathy’ Really What the Nation Needs?" respectively, the latter being a little too touchy-feely for where we're going but which begins on this note from Facebook's Mark Zuckerberg:
...“There is a certain profound lack of empathy,” he said, “in asserting that the only reason why someone could have voted the way they did is because they saw some fake news. If you believe that, then I don’t think you have internalized the message that Trump supporters are trying to send in this election.” When asked to articulate that message, he dodged the question.

“Empathy” is one of Facebook’s all-time favorite buzzwords. For years, Zuckerberg has hopped from conference to conference in a selection of muted hoodies and T-shirts, delivering variations on the same pitch. “More people are using Facebook to share more stuff,” he said in 2010. “That means that if we want, there’s more out there that we can go look at and research and understand what’s going on with the people around us. And I just think that leads to broader empathy, understanding — just a lot of good, core, human things that make society function better.”...
Closer to where Ms. Kaminska is getting to, but still coming in on a tangent is Om Malik's New Yorker piece, but here, you be the judge.
Picking up where we left off with the Alphaville post yesterday:

Algorithmic discrimination
...And yet, what is being lost in the midst of all this outrage, is that there’s an entity being born out there which stands to be far more discriminatory, bull-headed and fascist than any human being could ever be. That entity is “artificial intelligence”. Thus far, the entire quant/data-first movement which supports and feeds it, by actively celebrating the removal of feelings from the evaluation equation, seems entirely oblivious to that fact.

Yet, what we’re discovering through the AI big data phenomenon, isn’t just that algorithms discriminate on a continuous basis, it’s that they make terrible assumptions about the human condition when they do so. Without the ability to empathise or respect a human’s capacity to change, better himself or hold contradictory view points at the same time, algorithms crunch data for patterns and correlations and interpret them to assume x, y or z is a defaulter or a criminal just because that’s what the data probabilities for his group-type or associations suggest.

All in all, this is why discrimination is the single biggest problem facing the artificial intelligence field. It’s all the more imposing, we’d add, in sectors where AI and big data is being used to assess or reduce risk, such as insurance. If you smoke, live in a dodgy area and have a penchant for chocolate or wine, you might become uninsurable. Nor does the big data solutionist mindset address the fact that the rich, who can afford to pay the premiums, can get away with the wrong behaviours for as long as they have the money to fund the privileges.

And since algos can’t judge exceptions, or be appealed to in exceptional circumstance without the intervention of a costly human go-between, the only work-around is for the discriminated to agree to an extended period of extreme surveillance and restricted freedom....MORE
And the New Yorker:

Silicon Valley Has an Empathy Vacuum
Silicon Valley seems to have lost a bit of its verve since the Presidential election. The streets of San Francisco—spiritually part of the Valley—feel less crowded. Coffee-shop conversations are hushed. Everything feels a little muted, an eerie quiet broken by chants of protesters. It even seems as if there are more parking spots. Technology leaders, their employees, and those who make up the entire technology ecosystem seem to have been shaken up and shocked by the election of Donald Trump.

One conversation has centered on a rather simplistic narrative of Trump as an enemy of Silicon Valley; this goes along with a self-flagellating regret that the technology industry didn’t do enough to get Hillary Clinton into the White House. Others have decided that the real villains are Silicon Valley giants, especially Twitter, Facebook, and Google, for spreading fake news stories that vilified Clinton and helped elect an unpopular President.

These charges don’t come as a surprise to me. Silicon Valley’s biggest failing is not poor marketing of its products, or follow-through on promises, but, rather, the distinct lack of empathy for those whose lives are disturbed by its technological wizardry. Two years ago, on my blog, I wrote, “It is important for us to talk about the societal impact of what Google is doing or what Facebook can do with all the data. If it can influence emotions (for increased engagements), can it compromise the political process?”

Perhaps it is time for those of us who populate the technology sphere to ask ourselves some really hard questions. Let’s start with this: Why did so many people vote for Donald Trump? Glenn Greenwald, the firebrand investigative journalist writing for The Intercept, and the documentary filmmaker Michael Moore have listed many reasons Clinton lost. Like Brexit, the election of Donald Trump has focussed attention on the sense that globalization has eroded the real prospects and hopes of the working class in this country. Globalization is a proxy for technology-powered capitalism, which tends to reward fewer and fewer members of society.

My hope is that we in the technology industry will look up from our smartphones and try to understand the impact of whiplashing change on a generation of our fellow-citizens who feel hopeless and left behind. Instead, I read the comments of Balaji Srinivasan, the C.E.O. of the San Francisco-based Bitcoin startup 21 Inc., telling the Wall Street Journal columnist Christopher Mims that he feels more connected to people in his “Stanford network” around the globe than to those in California’s Central Valley: “There will be a recognition that if we don’t have control of the nation state, we should reduce the nation state’s power over us.”

It’s hard to think about the human consequences of technology as a founder of a startup racing to prove itself or as a chief executive who is worried about achieving the incessant growth that keeps investors happy. Against the immediate numerical pressures of increasing users and sales, and the corporate pressures of hiring the right (but not too expensive) employees to execute your vision, the displacement of people you don’t know can get lost.
However, when you are a data-driven oligarchy like Facebook, Google, Amazon, or Uber, you can’t really wash your hands of the impact of your algorithms and your ability to shape popular sentiment in our society. We are not just talking about the ability to influence voters with fake news. If you are Amazon, you have to acknowledge that you are slowly corroding the retail sector, which employs many people in this country. If you are Airbnb, no matter how well-meaning your focus on delighting travellers, you are also going to affect hotel-industry employment.

Otto, a Bay Area startup that was recently acquired by Uber, wants to automate trucking—and recently wrapped up a hundred-and-twenty-mile driverless delivery of fifty thousand cans of beer between Fort Collins and Colorado Springs. From a technological standpoint it was a jaw-dropping achievement, accompanied by predictions of improved highway safety. From the point of view of a truck driver with a mortgage and a kid in college, it was a devastating “oh, shit” moment. ...MORE
That quote from the Andreessen Horowitz/21Inc. fellow in the WSJ's "New Populism and Silicon Valley on a Collision Course" is representative of a lot of Silicon Valley thinking and is worth repeating in full:
...To many in Silicon Valley, this is just part of inexorable progress. Electing Mr. Trump won’t shield his supporters from the reality that they are now competing with every other worker on Earth, says Balaji Srinivasan, a board partner at venture-capital firm Andreessen Horowitz and CEO of bitcoin startup 21 Inc.

Mr. Srinivasan views the collision between tech culture and Mr. Trump’s populist movement as inevitable, and potentially so divisive that tech’s global elites should effectively secede from their respective countries, an idea he calls “the ultimate exit.”

Already, he says, elites in Silicon Valley are more connected to one another and to their counterparts around the globe than to non-techies in their midst or nearby. “My Stanford network connects to Harvard and Beijing more than [California’s] Central Valley,” says Mr. Srinivasan. Eventually, he argues, “there will be a recognition that if we don’t have control of the nation state, we should reduce the nation state’s power over us.”...
We mentioned Srinivasan in this weekend's "Why the FT's Izabella Kaminska Won't Be Invited to the Andreessen-Horowitz Christmas Party, Redux". She's pretty sure, and makes a pretty good case, that Mr. S. is running a bit of an Emperor's New Clothes operation.

Fortunately Artificial Intelligence is still in its formative stages, see "Investing AI: 'Why Machines Still Can’t Learn So Good'" if interested, and there is time to program into it some of the ideas raised in "Algorithmic discrimination".

And come to think of it, the computer scientist profiled in yesterday's "The Big Questions We'd Better Figure Out, Part 1: How Do We Humanize The Algorithms That Will Rule Us?" is closer to Ms. Kaminska's point of view than any of the writers we've come across this week, despite their very different career paths.
Go figure.

U.S. Digital Media Pageview Rankings, October 2016

From DigitalVision, :

US Media Publications Ranking October 2016
As the presidential election frenzy enters its post-election lull, let’s take a moment to visit one of the most controversial periods in election history and the impact that it had on October’s media publications ranking.

The recent election period saw a general awakening of politically heavy news sites; the first signs of change were visible already few months prior to the election. Take the publication, which was ranked at a mere 106 in June 2016. Over the last few months, it jumped 93 positions, reaching 13th place in October and was flanked by prominent domains like and

Keyword Contenders
Another indication of’s progress can be seen in the graph below which displays the top sites contending for the keyword “election” from May 2016 – Oct. 2016. showed the highest increase in its share of the search term, sparring against,, and the


Here are the first 20 of 100:

Rank in October 2016 Publication Combined Page Views
1 2,205,261,000
2 2,079,402,000
3 1,732,988,000
4 1,363,243,000
5 984,350,000
6 943,013,000
7 828,649,000
8 817,923,000
9 642,838,000
10 594,440,000
11 541,696,000
12 473,956,000
13 362,745,000
14 361,513,000
15 344,366,000
16 305,204,000
17 273,921,000
18 270,975,000
19 258,344,000
20 242,117,000

Aberdeen Asset Management Offers Grim Blueprint for Manager Survival

From Lipper Alpha Insight, Nov. 28:
Aberdeen Asset Management offers a grim how-to guide for fund manager survival. The UK group faces pressure from passive funds, zealous regulators and a protectionist Trump presidency. Chief Executive Martin Gilbert’s coping mechanism – more deals, fewer costs – applies to the sector as a whole.

Aberdeen‘s full-year results make for bleak reading. The group grew assets under management to 312.1 billion pounds, but this was flattered by the weaker level of sterling, and acquisitions. Net flows were negative. Despite the higher assets, revenue and pre-tax profit sank 14 and 28 percent respectively, as fee margins fell.

Aberdeen‘s challenges are individual and sector-wide. Its emerging market franchise has been pumped up by years of loose U.S. monetary policy, and now faces a stronger dollar as the Federal Reserve raises rates. U.S. President-elect Donald Trump wants to bring back domestic jobs from emerging economies, and may trigger trade wars. Trump may be all talk, but competition from cheaper passive and “smart beta” funds is not. Finally, regulators are demanding managers hold more capital and are scrutinising competition.

Aberdeen has strengths. Its emerging markets business may be more resilient to the passive onslaught than managers focused on more commoditised developed market equities. And its blended margin of 30 basis points is already lower than many peers’....MORE

Tuesday, November 29, 2016

Questions America Wants Answered: What's the Best Measure of a Portfolio--Sharpe Ratio, Alpha or Geometric Mean?

From the Social Science Research Network:

Measuring Portfolio Performance: Sharpe, Alpha, or the Geometric Mean?

Moshe Levy

Hebrew University of Jerusalem - Jerusalem School of Business Administration

September 11, 2016
The most popular portfolio performance measures are the Sharpe ratio and alpha. While the Sharpe ratio is optimal under the CAPM assumptions of normal return distributions and unlimited borrowing at the risk-free rate, we find that it is not well aligned with investors’ preferences in more realistic settings. Alpha is a poor measure under both the theoretical and the realistic settings. For investors with typical borrowing constraints, the geometric mean provides an alternative measure that is much better than both the Sharpe ratio and alpha. It may very well be the most important single number to consider in portfolio selection.

Number of Pages in PDF File: 30
SSRN download page

Ag Stocks: "Deere: Not Yet?" (DE)

The stock is down a-buck-and-change, $100.49 last. They don't always fill the gaps but there sure is a lot of air under this one:

DE Deere & Company daily Stock Chart
From Barron's Stocks to Watch:
Shares of Deere (DE) surged last week after the farm-equipment manufacturer reported better-than-expected fourth quarter earnings on Nov. 23, but JPMorgan’s Ann Duignan and Thomas Simonitsch still aren’t ready to change their Underweight rating. They explain why:
Last week, DE (UW) posted an upside FQ4’16 report and introduced FY’17 guidance above consensus; the stock is up 11% since the report vs. S&P 500 flat. We wanted to circle back with management before publishing our model update as we had a number of outstanding questions around the guidance. Management introduced its FY’17 outlook for net income of $1.4B (implied ~$4.42 EPS vs. prior consensus $3.84) on equipment sales down 1%...

Ag Equities: "Enough Fawning Over Deere" (DE)

The Big Questions We'd Better Figure Out, Part 1: How Do We Humanize The Algorithms That Will Rule Us?--UPDATED

Update below.
Original post:

A post by Izabella Kaminska at FT Alphaville earlier today reminded me of a piece at Quanta I'd meant to link.
I'll be coming back to the Alphaville riff tomorrow, there are just so many ideas popping out of it I can't do it during the work day. Here's one example in the first three paragraphs:

Algorithmic discrimination
Conversations across the political spectrum are exploding into emotionally charged and heated rampages — many of them focused on calling out x, y or z as bigoted, racist or discriminatory.

Deeming x, y or z as either or the other is beyond the scope or remit of this blog. What we’re concerned with is how this fits into the fake news paradigm and why it ultimately jars with the sacred notion that people are supposed to be presumed innocent until proven guilty — and that guilt should be determined through a fair evaluation of actions rather than words. This practice is a hallowed facet of liberal representative democracy because once someone is accused of holding an unpopular view, it’s often impossible to wage a convincing defence outside of this formal process.

Proving a negative is largely futile. Proving you don’t secretly think x, y or z, meanwhile, is nigh on impossible unless you support a hitherto only seen in sci-fi literature scale of personal intrusion (thought police, ahem), undermining not just the sanctity of the privacy of one’s mind but also the scope and feel of what it means to be an individual....
Well, what she's pointing out is such a threat to representative government that Machiavelli in his discourses on the first ten books of Livy's history of the Roman Republic mentions calumny (The making of false and defamatory statements about someone in order to damage their reputation; slander...O.E.D.) at least a hundred times and in fact dedicates a chapter (XIII of book I) to making the distinction between accusation as a tool for finding the truth and calumny as a method of destruction:

XIII In proportion as accusations are useful in a republic, so are calumnies pernicious

As you can see, we haven't even gotten past the intro, much less mentioned algos, and we're already off into some seriously important stuff and so, by your leave, I'll do some cut-and-paste from Quanta, who in any event are smarter than I by orders of magnitude and come back to Algo Discrimination mañana.

From Quanta Magazine, Nov. 23:

How to Force Our Machines to Play Fair
The computer scientist Cynthia Dwork takes abstract concepts like privacy and fairness and adapts them into machine code for the algorithmic age.
Theoretical computer science can be as remote and abstract as pure mathematics, but new research often begins in response to concrete, real-world problems. Such is the case with the work of Cynthia Dwork.

Over the course of a distinguished career, Dwork has crafted rigorous solutions to dilemmas that crop up at the messy interface between computing power and human activity. She is most famous for her invention in the early to mid-2000s of “differential privacy,” a set of techniques that safeguard the privacy of individuals in a large database. Differential privacy ensures, for example, that a person can contribute their genetic information to a medical database without fear that anyone analyzing the database will be able to figure out which genetic information is hers — or even whether she has participated in the database at all. And it achieves this security guarantee in a way that allows researchers to use the database to make new discoveries.

Dwork’s latest work has a similar flavor to it. In 2011 she became interested in the question of fairness in algorithm design. As she observes, algorithms increasingly control the kinds of experiences we have: They determine the advertisements we see online, the loans we qualify for, the colleges that students get into. Given this influence, it’s important that algorithms classify people in ways that are consistent with commonsense notions of fairness. We wouldn’t think it’s ethical for a bank to offer one set of lending terms to minority applicants and another to white applicants. But as recent work has shown — most notably in the book “Weapons of Math Destruction,” by the mathematician Cathy O’Neil — discrimination that we reject in normal life can creep into algorithms.
Privacy and ethics are two questions with their roots in philosophy. These days, they require a solution in computer science. Over the past five years, Dwork, who is currently at Microsoft Research but will be joining the faculty at Harvard University in January, has been working to create a new field of research on algorithmic fairness. Earlier this month she helped organize a workshop at Harvard that brought together computer scientists, law professors and philosophers.

Quanta Magazine spoke with Dwork about algorithmic fairness, her interest in working on problems with big social implications, and how a childhood experience with music shaped the way she thinks about algorithm design today. An edited and condensed version of the interview follows.

QUANTA MAGAZINE: When did it become obvious to you that computer science was where you wanted to spend your time thinking?
CYNTHIA DWORK: I always enjoyed all of my subjects, including science and math. I also really loved English and foreign languages and, well, just about everything. I think that I applied to the engineering school at Princeton a little on a lark. My recollection is that my mother said, you know, this might be a nice combination of interests for you, and I thought, she’s right.

It was a little bit of a lark, but on the other hand it seemed as good a place to start as any. It was only in my junior year of college when I first encountered automata theory that I realized that I might be headed not for a programming job in industry but instead toward a Ph.D. There was a definite exposure I had to certain material that I thought was beautiful. I just really enjoyed the theory.

You’re best known for your work on differential privacy. What drew you to your present work on “fairness” in algorithms?
I wanted to find another problem. I just wanted something else to think about, for variety. And I had enjoyed the sort of social mission of the privacy work — the idea that we were addressing or attempting to address a very real problem. So I wanted to find a new problem and I wanted one that would have some social implications.

So why fairness?
I could see that it was going to be a major concern in real life.

How so?
I think it was pretty clear that algorithms were going to be used in a way that could affect individuals’ options in life. We knew they were being used to determine what kind of advertisements to show people. We may not be used to thinking of ads as great determiners of our options in life. But what people get exposed to has an impact on them. I also expected that algorithms would be used for at least some kind of screening in college admissions, as well as in determining who would be given loans.

I didn’t foresee the extent to which they’d be used to screen candidates for jobs and other important roles. So these things — what kinds of credit options are available to you, what sort of job you might get, what sort of schools you might get into, what things are shown to you in your everyday life as you wander around on the internet — these aren’t trivial concerns.

Your 2012 paper that launched this line of your research hinges on the concept of “awareness.” Why is this important?
One of the examples in the paper is: Suppose you had a minority group in which the smart students were steered toward math and science, and a dominant group in which the smart students were steered toward finance. Now if someone wanted to write a quick-and-dirty classifier to find smart students, maybe they should just look for students who study finance because, after all, the majority is much bigger than the minority, and so the classifier will be pretty accurate overall. The problem is that not only is this unfair to the minority, but it also has reduced utility compared to a classifier that understands that if you’re a member of the minority and you study math, you should be viewed as similar to a member of the majority who studies finance. That gave rise to the title of the paper, “Fairness Through Awareness,” meaning cross-cultural awareness....MORE
Update: "The Big Questions We'd Better Figure Out, Part 2: Algorithmic Discrimination and Empathy"

Currencies: "Dollar Comes Back Mostly Firmer, but Focus is Elsewhere"

U.S. dollar index up 0.24 at 101.63; euro down a fraction at 105.75.
From Marc to Market:
The US dollar correctly [sic] lowered yesterday, but most of the selling was over by the end of the Asian session, and the greenback steadied in Europe and North America.  The dollar is firm against the euro and yen but within yesterday's broad trading ranges.  The Australian and Canadian dollar's gains from yesterday are being pared.  

 What had looked like a possible deeper dollar correction is turning into a consolidative phase that may be sufficient to alleviate the over-extended technical condition. Equities are lower. Of note, the Topix  12-day advance was snapped with a minor loss of less than 0.1%.   The MSCI Asia-Pacific Index is off 0.25% to snap a three-day advance.  The Dow Jones Stoxx 600 is off fractionally to extend yesterday's decline.    The MSCI Emerging Market equity index is lower by 0.25%, after initially building on yesterday's advance to reach a two-week high.   The South African rand is the weakest of majors, while the Chinese yuan, which was fixed higher by the PBOC for the second session, is the strongest of the emerging market currencies, gaining almost 0.3%.   European bonds firmer, led by a 6 bp decline in Italy's 10-year yield.  French bonds are also outperforming German bunds, narrowing the premium from a two-year peak.  The US 10-year yield is firm near 2.33%.  

Sterling is an exception.  It is firmer, following news that mortgage approvals rose more than expected in October to stand at the highest since March, while household credit increased GBP1.6 bln.   The Bank of England noted that the effective interest rate on new mortgages fell 11 bp in October to 2.16%, the lowest since at least 2004.  However, even with the upticks sterling has been confined to yesterday's ranges....MORE

Big Money: "What Did Sotheby’s Know And When Did They Know It"

Dirty deeds, not dirt cheap.
It's pretty well established that the punishment for an agent's breach of the duty of loyalty to his principal is death.
At least in Russia at any rate

From Art Market Monitor:
Perhaps you’ve heard of this lawsuit where the dealers who bought a $10,000 painting and sold it for $80m are upset that the buyer was representing another buyer who sold it for almost $50m more?

Such is the trouble that Yves Bouvier’s dealings with Dmitry Rybolovlev have caused. Bouvier, acting in the interest of Rybolovlev, bought works of art that he then sold on to the Russian at huge markups. The whole scheme fell apart a few winters ago in St. Barth’s when an art advisor clued Rybolovlev in to the prices Bouvier was actually paying.

The New York Times has a story going into further detail. The dealers who sold Leonardo’s Salvator Mundi feel that Sotheby’s, which sourced a dozen of the works Bouvier sold to Rybolovlev, should have helped them get around Bouvier so they could make the higher sale to Rybolovlev themselves.
Here’s what the Times says is the dealer’s evidence:
Much of the speculation about Sotheby’s role in the sale of the Leonardo revolves around what its representative knew, or didn’t know, in 2013 when he took the “Salvator Mundi” to a Central Park apartment, where Mr. Bouvier and Mr. Rybolovlev inspected it.
The meeting occurred six weeks before the sale to Mr. Bouvier and the flip to Mr. Rybolovlev. The meeting took place in a grand apartment, one of the most expensive in Manhattan, that is owned by a Rybolovlev family trust.
In its court papers, Sotheby’s argues that its representative, Samuel Valette, its vice chairman for private sales worldwide, did not realize it was Mr. Rybolovlev’s family apartment or that he was inspecting the painting as a potential buyer.
The meeting had been requested by Mr. Bouvier, the auction house said, and though Mr. Valette said that he recognized a third man in the room as having been associated with a previous sale to Mr. Bouvier, he said that he had not known his name.“
It was not, however, until much later that Valette and Sotheby’s learned that this third man was Rybolovlev,” the papers state.
One of the interesting wrinkles to this story is that Central Park West apartment. Rybolovlev bought it five years ago from Sandy Weil for $88m in a transaction that still marvels real estate experts. It seems that Rybolovlev’s credulous habits were not confined to his art purchases....MORE