U.N. to Replace Replacement Refs

From the Wall Street Journal:

 

Photo Illustrations by The Wall Street Journal/Associated Press

REFEREE: Ban Ki-moon, U.N. Secretary-General
This week in New York, the U.N. chief has been sternly warning world leaders against making threats about military action. As our referee crew chief, he seems like just the guy to deal with an angry Bill Belichick.

Photo Illustrations by The Wall Street Journal/Getty Images

FIELD JUDGE: Mahmoud Ahmadinejad, President of Iran
The Iranian president revels in his trips to New York, despite all of the spirited protests. It's fair to say he'd be able to tune out the boos if asked to make a tricky pass interference call.

Photo Illustrations by The Wall Street Journal/Zuma Press

BACK JUDGE: Bill Clinton, Former U.S. President
The former president's knack for seemingly endless speeches gives him special insight into one of the chief responsibilities of the back judge: calling teams for delay of game infractions.

...MORE

Jim Chanos on Shorting (Prepared Statement to the SEC)

From Santangel's Review:

This is a prepared statement Jim Chanos gave to the SEC back in 2003. It is interesting because it shines a little light on his methodology for successfully shorting as he goes through an in-depth case study on his short of Enron. Before I dig into his Enron short, I want to mention this quote he uses in his testimony as it is quite interesting.

“If you own shares in a company that declares war on short sellers, there is only one thing to do: sell your stake. That’s the message in a new study by Owen A. Lamont, associate professor of finance at the University of Chicago’s graduate school of business. The study, which covers 1977 to 2002, shows not only that the stocks of companies who try to thwart short sellers are generally overpriced, but also that short sellers are often dead right.”

We touched on this in How Eric Sprott got Solar Burn. Warning sign number six was “The company lashed out against its critics”.   The Wall Street Journal coined the term “Being Einhorned” today, but if I remember correctly, some of Einhorn’s best shorts have been the ones where the company most vigorously lashed back out at him. Lehman, Allied and Green Mountain come to mind.
Some takeaways from Chanos’s short of Enron:
Sometimes the best ideas are hiding in plain sight

“In October of 2000, a friend asked me if I had seen an interesting article in The Texas Wall Street Journal, which is a regional edition, about accounting practices at large energy trading firms. The article, written by Jonathan Weil, pointed out that many of these firms, including Enron, employed the so-called “gain-on-sale” accounting method for their long-term energy trades. Basically, “gain-on-sale” accounting allows a company to estimate the future profitability of a trade made today and book a profit today based on the present value of those estimated future profits.”

Even though Enron was incredibly complex, Chanos started with just the annual report

“The first Enron document my firm analyzed was its 1999 Form 10-K filing, which it had filed with the SEC. “

The major red flags were visible right away if you understood the accounting and had a sense for what the returns should look like

“What immediately struck us was that despite using the “gain-on- sale” model, Enron’s return on capital, a widely used measure of profitability, was a paltry 7 percent before taxes. That is, for every dollar in outside capital that Enron employed, it earned about seven cents. This is important for two reasons; first, we viewed Enron as a trading company that was akin to an “energy hedge fund.” For this type of firm, a 7 percent return on capital seemed abysmally low, particularly given its market dominance and accounting methods. Second, it was our view that Enron’s cost of capital was likely in excess of 7 percent and probably closer to 9 percent, which meant from an economic point of view, that Enron wasn’t really earning any money at all, despite reporting “profits” to its shareholders. This mismatch of Enron’s cost of capital and its return on investment became the cornerstone for our bearish view on Enron and we began shorting Enron common stock in November of 2000 for our clients.”...MORE

HT: Market Folly

"Shanghai Composite Update"

As soon as I wrote:

 "We've gotten about 15% (to the downside) out of the Shanghai index and it may be time to re-think the master plan for world domination (ours, not China's)
The index is holding 1% above Monday's 44-month lows."

in yesterday's "China's Conference Board Leading Index Spikes, at Odds With Shanghai Stock Index", I thought "What's a word for arrogant overconfidence?". Then I hit the "send" button.
Sure enough the index promptly traded down to 1,999.48 before closing at 2,004.17, multi-year lows on a closing and an intraday basis.

Here's Doug Short at Advisor Perspective:

Last night the financial press featured the decline in the Asia-Pacific markets: "Asian Stocks Fall on Investor Concern on Stimulus Effect" and "Asian shares fall on wariness over Spain" (more here).
Japan's Nikkei fell 2.03%, dropping it below the 9,000 level. But that's a line in the sand that the Nikkei has crisscrossed many times.

More striking was the 1.24% selloff in the Shanghai Composite. Why? The index briefly dipped below a more significant line in the sand -- its 2,000 -- hitting an intraday low of 1,999.48 before closing at 2,004.17. Will the 2,000 level provide support?

Click for a larger image

As the chart above highlights, the last time the Shanghai closed below 2,000 was in January of 2009. This will be a level to watch in the coming days.

"Fierce Taiwan-Japanese Water Canon Battle on the High Seas"

From The Economist:

A SMALL fish like Taiwan, diplomatically isolated as it is, does not often pick a fight with both of Asia’s largest economies at the same time. But this disputed island chain, known to Japan as the Senkaku islands and to China as the Diaoyus, is casting its strange spell across the whole of the East China Sea.

A fierce shootout with water-cannon broke out between Japan’s coast guard and Taiwan’s on the morning of September 25th. The Japanese side was trying to repel an armada of almost 60 Taiwanese fishing vessels, which had sailed irritatingly near the islets, by blasting some of them with deck-mounted water cannon. Taiwan’s patrol boats retaliated by firing back with their own high-pressure hoses at the Japanese coastguard ships, all the while booming over loudspeakers that these rocks are the sovereign territory of the Republic of China (Taiwan’s official name) and that the Japanese vessels must leave Taiwan’s territory immediately. The fishing fleet managed to sail within three nautical miles (5.5km) of the disputed islands, before being turned back by the Japanese side. Meanwhile Taiwan’s navy dispatched frigates to the country’s north-eastern coast and scrambled warplanes, such as F-16s and Mirages, to monitor the civilian armada, according to a statement issued by the defence ministry on September 26th. The point, they say, was to be prepared for any eventuality. The president, Ma Ying-jeou, lent his support too, not missing a chance to add that the waters around the contested islands have been fishing grounds for Taiwan’s fishermen for more than 100 years.

This marked Taiwan’s first foray into the waters that surround the uninhabited Diaoyus since the Japanese government first nationalised a few of them, two weeks ago. The Japanese government is said to have protested to Taiwan through Japan’s de facto embassy. The incident complicates the ongoing row between Japan and the People’s Republic of China, over the archipelago’s sovereignty. Even without Taiwan’s interference, the affair has triggered huge protests on the mainland, some of them violent, and calls to boycott Japanese business....MORE

HT (and headline credit): Economic Policy Journal

Further south, the situation at the Spratley Islands is even more confusing with Malaysia, Taiwan, China, Philippines, Brunei and Viet Nam claiming the rocks

Commodities: Focus on Rolls Not Spot

Following up on yesterday's "Natural Gas Pops 3.6% Ahead of Tomorrow's October Expiry", a reader sends us this John Kemp piece, from Reuters:

Roll returns rather than spot price movements have been a much more significant source of profits and losses for commodity investors over almost any time horizon.

Yet most investors still formulate their strategy in terms of outright price moves rather than the spreads, missing out on the most important source of long-term performance.

Strategies with the most explicit focus on roll returns, such as the SummerHaven Dynamic Commodity Index offered by U.S. Commodity Funds, which had $432 million invested at the end of June, account for a tiny fraction of the $50 billion invested in all commodity-focused mutual funds or the nearly $200 billion invested in indexing strategies as a whole.

Over the 10-30 year horizons that most interest pension funds, roll returns may be the only sustainable source of returns from commodities.

But given the theoretical and empirical importance of roll returns, it is surprising how few index products have been designed specifically to maximize them.

In principle, it should be possible to offer investors a product which targeted roll returns specifically and is neutral to spot prices, by investing exclusively in spreads, with the aim of capturing scarcity premiums in the market while avoiding exposure to cyclical variations in commodity prices.

Most of physical trading houses already claim to operate this way (with positions in the spreads rather than the outright directional plays). But as investors question whether the commodity super-cycle has peaked or plateaued, it would make sense for other investors to contemplate the same strategy.

ROLLS DOMINATE
By now most investors are aware that it is not possible to achieve returns based on the spot price of WTI or a basket of commodities.

But few investors appreciate just how significant roll returns are. In practice, rolls dominate all other sources of performance over the medium and long term.

Charts 1 and 2 show spot prices and actual returns to investors from a long position in WTI futures or a diversified basket such as the Standard and Poor's Goldman Sachs Light Energy Index. In both cases, once roll profits and losses are taken into account, actual returns diverge sharply from the spot price....MORE

Palladio is Turning Over in His Tomb

And a fine tomb it is.*
I saw the story yesterday under the FT Alphaville headline "Crispin Odeyous".
It wasn't until I saw the DealBreaker link to the Telegraph that I realized what a pig this guy is:
UK Hedge Fund Manager Sets Unreachably High Bar With Resplendent Private Residence For Chicken Friends

…Odey has upped the ante for poultry accommodation – he’s building a temple for his chickens for which the stone alone costs £130,000. The Palladian-style chicken house, designed by Christopher Smallwood Architects, has won planning approval from the Forest of Dean District Council...

...(For those who can appreciate the news without worrying about what it’s going to cost them, here’s a blueprint of the chicken mansion, courtesy of FT Alphaville):


Crispin Odey’s chickens come home to (a luxury) roost [Telegraph via FT Alphaville]
*And the lives of all deep-pocketed animal owners thinking a bedroom and half-bath are gonna cut it.

Here's one of my fav Palladian buildings, a shack that Count Girolamo Chiericati commissioned from Palladio:

 
Palladio's Palazzo Chiericati in Vicenza
Somehow it doesn't seem as grand when compared with the chicken coop.

*Here's the tomb:

Rentseekers in D.C.

From The Economist:
Rent-seeking
When did Washington change?

LAST week, the Census Bureau published new county-level income data, which revealed that seven of the nation's ten richest counties are located in the Washington metropolitan area, a share that has only risen of late. This development led to an interesting round of discussion concerning the parasitism of the capital region, some of which you can read here.

I don't wish to dispute this story. It is difficult to miss the presence of large military contractors in the area, the ranks of which soared after the attacks of September 2001. It is disconcerting to see tech stalwarts open offices in the city in order to better conduct their patent wars. There are health and financial industry complexes here, as well, and a substantial portion of their activity is directly geared toward influencing rules and spending that pertain to their businesses. As Matt Yglesias writes, the great success of the Washington metro area can be attributed to the fact that it is very well educated and very well educated places have done well in recent years. But as he notes, one then has to wonder why so many well educated people are here.
But I would advise a little caution in interpreting these figures for one very important reason: clusters of skilled workers are very persistent.

Take as given that some of the recent economic success in the Washington area is down to increased rent-seeking. If one looks at the recent performance of other cities with similar concentrations of tech and science workers, like Boston or San Francisco, one has to conclude that quite a lot of the recent gain is down to economy-wide increases in the returns to clusters of skilled workers. We can then take as given that the gravity of the government is responsible for rooting a skilled-worker cluster in Washington. But when?

From the 1930s to the 1950s, government (primarily military) spending and research in the Bay Area helped seed a cluster of technology firms that became Silicon Valley....MORE

The Bay Area story is true only to a point.
Another high tech bay area cluster were the Kaiser Shipyards in Richmond Ca. They were rather a big deal in the early '40's:

 Shift change, 1942

Using the most advanced manufacturing techniques in the world, the Kaiser shipyards were building ships in two weeks and in one demonstration completed the S.S. Robert Peary in five days.
The shipyards were the home of Rosie the Riveter:

Richmond Shipyard Number Three, part of the National Park Service's Rosie the Riveter--World War II Home Front National Historical Park, is located at the tip of Potrero Point in Richmond. The shipyard is currently closed to the public while safe methods of public access are developed. For further information, visit the park's website.

Nowadays Richmond routinely places on the Ten Most Dangerous Cities in America lists, scoring a personal best #3 for murders in 2010.
So the persistence of clusters idea only goes so far.