Tuesday, February 28, 2017

Paying for research

This morning I was reading that CLSA -- since 2013 proudly owned by CITIC -- was shutting down its American equity research department -- 90 people will be affected!

Now the value of a lot of research is limited, that is not to say that all research is bad. In fact, I remember that GS's Asia Aerospace research was considered the bible for the sector.  Granted, there was little you could do with the research since the "buy" was for Chinese airlines...that were state owned.  Still it was a vey valuable tool in understanding the local dynamics.  It seems that the US has introduced new legislation that forces brokers to "sell" their research services!  Figures of $10,000 an hour have been mentioned...

Now, research can be sold many times; if GS has 5000/6000 clients they may sell the same research 300x or 400x (I exaggerate) but this is the key -- Those who buy the research are, I presume, prohibited from giving it away or selling it, at the same time the same research can be sold a number of times therefore its value falls as more and more people are aware of the "special" information.

So pricing research is difficult because its value falls based on three principal factors:
  1. Is it any good 
  2. Timeliness of the information
  3. How widely it is distributed
  4. Value is only there if the market finds out about the information
The first will be the hardest, since from now-on research will be behind a paywall - it will be very hard to figure out what is good (there is also the problem of confirmation bias) and what is truly worthless.  Timing:  when did you get the information and was it insider information (by receiving the info you may be breaking the law).  The third is, if 500 people saw the information it is a lot harder to make money of this "privileged" information.  Finally, and this is the big one, very often it is the information that triggers a price change.

As en example, a Japanese company is today sitting on US$ 500 million in cash, yet the market cap of this company is less than US$ 500 million (its actually a real company that is trading around $220 million).  Now if this information is "secret" how will the market know to buy this company's stock to unlock the potential value in the cash at hand?

These were always the problem for paying cash for research -- the value of research changes over time, and a piece of information can be very valuable to a buyer but not to another, adding to the problem.  

CLSA's response is probably the most logical -- give up the ghost and become a pure execution shop. For the others (especially American firms) the solution is seeking payment and shutting down operations (research).  Some research is so bad, that it may simply cease to exist.  More importantly, it will become increasingly difficult for good analysts to emerge -- how do you know an analyst is any good if his research is behind a paywall?  

Finally there is also the law of unintended consequences:  Companies covered by analysts are "giving away" the information to the brokers -- in fact it has a cost to the company (management time, booking a room, hookers etc etc).  If I was the CEO of a major fortune 500 company I would tell the brokers that they have to pay to get the access to the company that the information on the conference call will only be available to the analyst that asked (and paid) for the information.  After all, if the information is valuable brokers should be willing to pay for it?

The logic of companies giving away information to then having it sold...it seems to break the agreement between brokers and companies.

Friday, February 24, 2017

Steve Bannon: He said what?

Earlier today (Friday) Bannon was speaking at CPAC, and he said:  "The cabinet secretary were selected for their task of "deconstruction of the administrative state"

I mean looking at Trump cabinet you feel that those appointed hate their job and department; turns out they were selected for that very reason -- the destruction of the organ of state.  This is truly amazing that a senior White House official and confident to the President that the entire decision of selecting the cabinet is to ensure the destruction of these departments.  It also explains why so few of the confirmation required jobs have been filled -- there will be no job to take over.   If the intent is destruction (and quickly at that -- the mid term elections are just around the corner), then they have to move quickly.  Already on February 3rd legislation has been introduce to eliminate the EPA. Education has to be next, Social Security administration (since it will be pawned off to Wall Street), Department of agriculture and Department of the Interior -- easy picks for the current administration. It would seem that the department of Energy is more complicated since they supervise the storing of nuclear arms...

Privatizing social security and grant for states to administer medicare and medicaid will certainly cut the size of government.  Keeping medicare/medicaid at the level of general inflation will kill these programs within 10/15 years (medical inflation is running 2x or 3x the level of genera inflation).

Trumps' White House has declared war on the Federal government -- and both the Senate and Chamber of Representative will watch the Federal government being dismantled with glee.

Could this mark the end of the American Empire -- where police are given additional powers (national guards too), to not only arrest but also to depart (i.e. being judge and jury)?  This sounds needlessly pessimistic, on the other hand Bannon has no issue with the world knowing exactly what he is planning -- he must feel confident that there are no barriers to his tasks to admit it so freely!

Watch out below...

Thursday, February 23, 2017

French Elections a primer


Don't read Zero Hedge or the other right wing  about the French presidential elections!

The French have many political parties and they wanted their president to be elected with an absolute majority.  The solution:  Presidential election with two votes, the first will take place on April 23 2017 and if the winner has less than 50% of the vote, the top two candidates will have a run-off election on May 7th -- two weeks later.

Now, Marine LePen is polling at 27%, which gives her the lead, but doesn't make her the president, because most French detest the far right party that is anti-europe, anti-immigation and basically racist.  So the runner up at 20% is Macron, an ex-socialist (economy minister) that was considered too far to the right (of the socialist party) then you have Fillion at 17% and the others somewhat less than that.

The key here is who is going to be #2.  Everyone believes that slightly more than 1/4 of the French electorate are pro-Front National, but that still only 1/4 -- most socialists will not vote for LePen nor will most conservative.

The polls have been consistent, LePen is always around 25/30% and never more.  The French, unlike the Americans see voting as a solemn duty, and therefore they will vote.  They may not love Macron or Fillion, but they will vote for them to keep the far right out of office.  Now its always possible that France has a change of heart -- after all Trump did happen!

But the number tell a very different and consistent story.  Moreover, Macro (the #2) is well regarded by the Socialist (he was one of them) and by the conservative (he likes a lot of their policies).

The odds of LePen winning are very lower, probably in the order of 5%. But as with Trump 5% is not zero.

Unintended consequences part II

Alternative energy

This week The Economist has a long spiel on Alternative energy and how it generate grid issues. While this is true to some extent the reason is not entirely what the Economist thinks is the problem. There is no doubt that someone has to pay for potential power.  But, and this is important, the nature of the competition is changing.  Rooftop solar is a problem because the houses are empty during the day and full at night.  Its a problem because rules are such that utilities have to buy the power when its available, not when its needed.

But again technology is at the rescue.  In countries where the obligation of the utility of buying rooftop solar is low (and that battery technology is now emerging as a cost effective solution) then there is the potential for true shift in production away from polluting technologies.  I am happy to pay for the nearby potential power from the gas powered station if, and only if, the utility is also happy to pay me for potential power -- eliminating market disruptions via subsidies and economies of scale (as the number of battery owners increases the risk of disruption falls.

More interestingly what has happened to solar cost over the past five year is absolutely dramatic.  In June 2016, Dubai signed agreements to buy power at 2.99c per w/hour -- this was already an amazing price, if you consider that only 5 years ago, the most competitive Spanish plant was pricing its power nearer 15.0c per w/hour.  More amazing, in the past month Dubai signed another agreement where the price of power was just 2.0c per w/hour.

Trump and is coal friends are trying to turn the clock back -- first by removing subsidies (and allowing coal producers to pollute to their heart's desire (black heart)), but the reality is that coal's time has past!  Within the next decade solar costs should fall below 1.0c per w/hour -- making solar the cheapest form of energy, with zero variable costs and a life span of 20/30 years.

The addition of batteries will regularise the grid far more effectively than what is available today, and the wide distribution of batteries across the network will dramatically reduce congestion within the networks.  The Trump push against green energy is perfectly timed -- without the distortion the market will allocate resources more effectively -- and in all cases solar (and wind) wins!

The unintended consequence -- the push for coal/gas and other polluting technology will actually encourage the installation of solar and wind, because in a perfectly competitive environment the green energy solutions ARE more economical.


It didn't take long, Mexico is already sniffing around to replace some American imports with imports from other countries; the first to be hit are the farmers (you know the middle state that voted for Trump) next will be Texas and Arizona -- and a bit of California.

It has finally dawned on Mexicans that food security is critical, and the games being played by the Federal (under new management) government and some state governments has given the idea that reducing its dependence on the US may be an excellent idea.  First, will be agricultural products, it just so happens that Argentina is looking for export markets for its grain production -- second is meat again Argentina and Paraguay are looking for new export markets -- they also have the added benefits of not using hormone in their beef production.

Mexico is America single largest grain export market...suddenly your sure bet has become a not so sure thing.  Travel restriction, border harassment and even the occasional cop playing the why are you hear card have made America a far less welcoming place for many Mexicans.

So it is more than possible that Trump will find itself with a far larger trade deficit -- remittance should be tailing off, the 2016 remittance bump was outside the norm and should resume its historical trend sometime in 2017.

For farmers in Iowa this is all terrible news, for Arizona, New Mexico and Texas its a warning shot that should not be dismissed out of hand.  Trump's America has increased the cost of business (harassment, uncertainty) its only natural that Mexico looks for new markets.  The most amazing thing here is not that its happening, but its an organic shift -- there are no political pressures, there is a "feeling" that the political landscape in the US could become more volatile, more anti foreigners, and the way to reduce that risk is to reduce exposure.  The US has always been Mexico's largest trading partner -- before NAFTA it was around 75% of all Mexican exports were destined for the US market, but now its nearly 90%.  maybe too much of a good thing.

When "salt of the earth" farmers start going bust maybe congress will pay attention, then again maybe not!

Tuesday, February 21, 2017

34 of 549

This is a short one, but telling:  There are 549 US government jobs that are subject to Congressional conformation.  So far Trump has nominated 34 (not passed, nominated), it means that there are 515 jobs that require congressional approval that have yet to have a name associated to taking over.  Granted its early days, but Trump and friends have had from November 9th to January 20th to find these people -- so far only 34 have been found.

Its not that the White House is chaotic, its just not taking care of business...

Monday, February 20, 2017

Enemy of the People!

This is no longer about "alternative reality" it is about power and the ability to control the agenda. Trump and republican congress have for years worked on the premise that their vision of the world is correct, and that the press are "lying liars"! So far, they've been supported by FOX news, Breitbart and Alex Jones (and many many others). It was funny at first, Americans thought that this was going to pass, and that eventually the American people will figure out that they were being lied too!

Reality is otherwise, poorly informed, scared of the world, getting their news from "alternative news sources" that has a different agenda -- selling fear. The arrival of Trump is the first instance where the Right has a chance to really change things around, with a majority in Congress they can make substantive changes that will be permanent; shutting down the Education department and the EPA (now that they know that the Energy department is mostly about supervising America's nuclear arsenal...). Ending the ACA (aka Obamacare) -- the ACA will be killed not by some grand act, but by neglect ( e.g. an essential piece of the puzzle will be eliminated) and suddenly the ACA will cease to exist in most of America. I suspect that by the end of 2017, most of those who obtained their healthcare via the ACA will be without healthcare, because insurance companies cannot make the numbers work -- if insufficient healthy Americans register the system doesn't work.

I suspect that the State Department will be gutted, that the Federal Reserves will become an adjunct to the White House, all this in full view of Congress that has decided that for now Trump is good for their agenda -- and they are largely right.

However, how long will it take for certain senators or congresspeople to become "The Enemy of the People"? My guess is that McCain must be near the top of the list -- and what are the implications? If you've made some group "enemies" it is easy for others to join a growing list of perceived "traitors". Today, Paul Ryan is a "friend" but could become an "enemy" should he block Trump's projects.

Will the worse case scenario unfold? I hope not, bit already border agents are far more aggressive and taking a very serious look (sometime based on racial profiling) of would be visitors -- again this is largely "circumstantial" evidence, because everyone has a agenda. Recently, some US Congressmen (they are mostly guys) are asking for their "armed friends" to protect them from protesters. How long until we have an accident; where the police will decide that: the black unarmed women was at fault for walking down the street and that the white guy with the modified M16 was in his right to shoot her in the head?

America has always prided itself on the idea of an armed milicia -- Once the gloves are off, they are off for good! Already efforts are afoot to reduce the inspection power of the electoral commission so Americans could eventually be greeted by a candidate's armed friends near the poll to insure that no voting irregularity occurs...well that is the price of peace in America.

At the other end of the spectrum I learned that there are currently 16 intelligence agencies in the US. Probably too many. America has been on a war footing since the terrible events of September 11, the police have been provided with nearly "assault like" armaments (even Stanford University has military style equipment). The leaks of the last four weeks provided Trump with a wonderful opportunity to "streamline" these agencies, and change the country's intelligence apparatus for ever.

Granted this is a very very gloomy look at what could happen, but the truth is that the usual balance between the executive and the legislative seems to have disappeared. That Congress would investigate Benghazi more than 10 times but cannot find the time to investigate the White House/Russia links or that any review of the Russia links focus only on the leaks... is telling.

Trump is no Hitler, but both had enablers that were more than willing to look the other way, because of their short term interest. The American legislative branch is in this position today, and it is very worrying because it would be very easy for a shift to occur.

Trump has been able to "reshape reality" On Friday is mentioned the "terrible events in Sweden" in a speech about terrorism -- the Swedes had no idea what he was going on about, apparently he was referring to a documentary about the immigration problems in Sweden...but America (and Sweden too) though he was referring to a terrorism act -- probably a poorly worded phrase on Trumps' part, but for a lot of Americans -- there was a terrorist act in Sweden that the MSM media didn't cover...me thinks conspiracy! Voila -- reality has been shifted -- the press is not covering the important stuff, they've become the "Enemy of the people"

Greece: The fun continues & Spain

So of all the billions that were borrowed by Greece over the past 4 years, how much was "new money" and how much was refinancing old existing debt?  Most finance people I spoke to said that they thing that between 15/20% of all funds borrowed by Greece over the past 3 years was "new money" to support the economy.  The population at large believes that its 100%.  What is the real figure?  Well in fact, the number is a little lower; the total new money that Greece raised over the past 3 years is about Euro 300 billion, of which slightly less than Euro 24 billon was "new money" or about 8%.  Although truth be told Greece's debt has shrunk from Euro 360 billion to Euro 300 billion between 2012 and 2017...  The goal for the ECB was to refinance the European banks loan to Greece -- socializing the debt.  The exercise is now largely completed, so the next tranche of money will be harder to obtain -- as Germany keeps on reminding everybody.

The reality is that Greece got the big squeeze by Europe and the IMF.  The pain has been excruciating with unemployment north of 20% -- and this for many years.  Generations of Greeks will have had no job for a decade.  There are implication when things like that happen.  The truth is that the European game was/is rigged.  Germany keeps on producing massive trade surplus -- that means that there are massive trade deficits that have to be financed (it is a zero sum game); Europe's trade is largely self contained.

On other news, the ex-central bankers of Spain are being called in by the courts to answer why the central bank proceeded with the IPO of Bankia (360,000 investors lost everything) when they knew full well that the bank was on the verge of insolvency.  The powerful being called to explain what they did!  A new thing.

Could be intersting!

Wednesday, February 15, 2017

National Security & Trump

Well this takes the cake!

Flynn fell on his sword (you knew it was going to happen when "the President supports Michael Flynn" line came across the wire). The implication is potentially very serious. There is no doubt that the FBI took their sweet time in investigating this problem. The problem is this: When did the President know and what did he know (these words made famous by the Watergate scandal).

Right now Flynn is gone, fine and good, but one has to wonder why he would have gone to the Russian on his own without the approval of his boss. Today, Zero hedge, a news site that has known "pro-Russia" positions when to some length to say that "there is no evidence" provided by the media that the relationship between the Trump campaign and Russia was anything real/bad or that the Russians were giving orders to the Trump camp.

Hmmm, a news site "bitching" about the lack of "proof" from the media! Journalists have hatted Trump from the very start -- granted they are often prima donna's but it remains that Trump has gone out of his way to antagonize the fifth estate. He should not be surprised that they are gunning to bring him down. They know he's a hack and not very prepared or really that interested in this role of President. Once again Trump has made the news on Israel -- where the two state solution may no longer be part of the peace solution -- will this be like the Jerusalem Embassy thing -- a quick easy statement that will have to be re-visited in two days?

The problem for the Trump administration is that the comments about the Trump camp going all the way back to the nomination convention (where the Trump team made a bit change to the party's platform on Russia -- the only change they requested) and when there seems to have been computers talking directly from the Trump camp to certain Russian banks, to Flynn's talking to the Russian Ambassador. That Russia didn't react to the expulsion of one of its diplomats (somewhat unusual) indicates that Russia expected much more favorable treatment from a Trump White House than it got from Obama.

All this stuff around Russia/Trump is serious stuff (we are talking treason here) and Flynn would have know that! He must have been pressured by someone (maybe Trump) to go and reassure the Russians. The more you think of what Flynn did the less it looks like a "rogue agent" move, and more of a plan administration project.

In foreign affaires the whole thing has been a dog's breakfast -- first Taiwan -- 10 days later Trump re-affirmed the "one China" policy, then there was the Jerusalem Embassy -- again walked back, the very poorly written immigration presidential act -- which got a 3-0 thumbs down from the court of appeal. Now this Russian problem that will probably not go away -- first because the FBI/CIA/NSA are all investigating. Come-on, if you just watched the West Wing you know that all communication between certain key people in the US and the Russian/Chinese are monitored. What kind of dumbass doesn't know that! They made an episode about it...

So far, Trump's success have been few and far between:

Reform/cancellation of the ACA NO -- frankly the GOP has no idea of what to do!
Massive infrastructure program -- No
Piss off Mexico/Australia/Germany --yeah he did do that
Tax reform -- Next two weeks...its going to be great
TTP agreement -- cancelled he did do that!
Recognized Taiwan -- did that but 10 days later re-affirmed the one china policy, screwing Taiwan
Reopen NAFTA Yep he did do that. Didn't count of Canada's enthusiastic support
Asked the VP to examine how the election was stolen. GOP congress told him (again) to take a hike
Russia -- could be nothing could be a Watergate, right now its bad but not terrible, but many are digging...

Monday, February 13, 2017

What's going on with my views


I write this mostly as a way of "ordering my thoughts"  and now I see that 433 people have looked at my posts.  What the hell!

Trust me whoever you are.  I am not that interesting, I am usually wrong and way too bearish.


Uncertainty: the law of unintended consequences

A new administration always brings change to the economic/politics landscape and it's inevitable. The work of Trump and his crew falls well within the scope of what other presidents have done. As en example Obama's first executive order was to close Guantanamo Bay prison -- 8 years on its still there, so although the act was serious (and to many American was a terrible idea) it remained that many executive orders go nowhere.

Now, Trump has a way with words and seems generally undiplomatic, the fact that he seems to have difficult conversations with several world leaders -- and even hung up on the Prime Minister of Australia says more about Trump then them! This is an unusual situation that has consequences -- Trump will receive little respect from world leaders when he needs to negotiate with them.  Trump cancelled the TPP -- its his right, but if he was looking for a way to "manage" China -- the TPP was a good way of getting started.  

However, Trump's recent tweets about legal immigrants (H-B1 & students visa) are more troubling. Students who are considered the US may decide that they are better off elsewhere -- a short term win for Trump, but negative long term implication for America.  When the best and brightest no longer consider the US as a prime destination for their education it has long term implication for America. HB1 visa holders face a similar dilemma; companies are telling their HB1 visa holders that they are far from certain that they will be able to renewed their visa's when they expire. These workers will look for alternatives where they will not face the risk of being kicked out of the country. 

These workers are looking for jobs elsewhere. Companies that were thinking of relocating their offices in the US are re-thinking their strategy, and big US tech firms are looking to expand foreign campuses. These workers are America's edge today -- its not assembling iPhones (despite what Trump seems to think) the vast majority of the value of the iPhone is in America, and not in the cost of assembly (which is around $10 per phone), the balance is value added to Apple...

If America is no longer seen as a land of opportunity for the best and brightest, then the best and brightest will go elsewhere, and that has implication for America, where Trump wants GDP growth to exceed 3%. 

However, people pay attention to these statements; the red states love it others who pay attention are those potentially affected by these changes -- if you've had words with HR over the past few weeks (and BTW you get weekly job offers) then you take it seriously, and may decided that America is no longer right for you. 

Monday, February 6, 2017

So life goes on. Two weeks of Trump

you've got to hand it to Trump; he has managed in less then 2 weeks to pissoff Mexico, China, Germany, France, and the Uk.  Plus to add more fun he's manage to pissoff the Australians...it takes some effort to achieve that level of success.

So far he's made the Canadians happy; by reopening NAFTA (to teach the Mexicans a lesson I guess) and Israel.  The Canadians cannot believe their good luck...they've been furious as virtually every single car plant in Canada has been shut, and Canada has a large trade deficit with the US -- a real opportunity for the solf lumber industry and some of Canada's dairy producers that have been kept out of the US market.  Trump must had wondered what all that cheering was when he starts his little fight with the Mexicans!  As for Israel, they were best buds until Israel pointed out that moving the Embassy to Jerusalem was maybe not the best idea, and then that add insult to injury the right wing press (in Israel) have been saying unkind things about Trump.

Yes Trump is a special guy, who will go down in the history books as a guy with a massive ego, who know nothing about the constitution or the separation of power.  I have no idea how long he will last, already the crazy wing of the GOP wants him to abolish the ACA without a replacement (freedom caucus but also the mean wing of the GOP), talking of impeachment! It's been two weeks, feels like much longer.