Wall Street Journal Recap: January 17-22, 2017

My full notes and analysis on the Wall Street Journal from the past week: January 17-22, 2017 (Week 3).  Please Enjoy.

Buffett & AIG

AIG paid Berkshire Hathaway $10 billion to bring “stability to their balance sheet” and gives them “greater certainty”.  (link)

Meanwhile, Warren Buffett has said, “We pay a high price for certainty.”  Howard Marks added to this comment, “People who want to buy bargains should prefer uncertainty.”

Translation: AIG paid a high price and Buffett got a bargain.

China & Autocatalytic Reactions

China’s economy achieved yet another year of “stable” GDP growth, but their growth comes at the expense of increasing disorder everywhere else in their economy.  This type of behavior is known as an “autocatalytic reaction.”, which is a mental model that I now use to think about China’s economy.

Autocatalytic Reaction: “Order can be created in a system by an even greater decrease in order of the systems surroundings…The order of the Earth’s atmosphere increases, but at the expense of the order of the sun. The sun is becoming more disorderly as it ages and throws off light and material to the rest of the universe.” (wikipedia)

China creates GDP Stability at the expense of Economic Chaos everywhere else.  Below are examples of China’s autocatalytic economy in action.

“GDP Stability”

  1. IMF Raises Growth Forecast for U.S. Economy (link)

“(China) is laboring to keep growth chugging along…the government used its long-worn playbook of state policies to stimulate growth.”

  1. China Hits Growth Goal On Big Does of Stimulus (link)

“Beijing is expected to double down on old growth drivers this year – including fiscal spending and the property market- to keep the economy stable in an important year of leadership change.”

“Beijing posted the lowest annual growth in a quarter-century, and economists say it only got there by relying heavily on short-term measures that are likely to delay much-needed reforms to bloated state-owned companies and the country’s inefficient financial system.”

“Economic Chaos”

  1. A Risky Twist on Repo Trade in China (link)

These “dai chi” agreements are outrageous…Used to temporarily move funds around in order to skirt government audits, as well as take on more risk.  Doesn’t this sound familiar to AIG and credit default swaps?

“A little-regulated practice that companies have used to borrow hundreds of billions of dollars and move risky assets temporarily off their book.”

“The risk is that dai chi agreements tend to be informal and often don’t leave a paper trail.”

“These transactions, by one estimate, may easily top $1 Trillion in value.  The practice is just one of the many unexpected risks that have sprouted up in China’s long credit boom.”

China’s credit boom has “helped send Chinese bond prices to a 14 year high in mid-August and pumped up markets for everything from iron ore to garlic.”

“Traders say the deals are so opaque that even estimates are hard to make.”

Banks sometimes use the dai chi agreements to move risky assets temporarily off their books during earnings periods or audits, the people said.  Brokers like Sealand typically use them to borrow quickly and flexibly-leveraging their investments many times over,”

  1. Copper Tethered to Dollars’ Moves (link)

Chinese investors are grasping for any investments to get their money out of China or the Yuan.  As a result, they are creating volatile and unusual behavior in Copper prices, among other asset classes.

“Metals and other commodities that are priced in dollars tend to fall when the dollar appreciates…But copper and the dollar have been moving nearly in lockstep recently, a phenomenon that many analysts attribute to rising appetite for copper among Chinese investors seeking to protect their wealth against the risk of a sharp Yuan depreciation against other global currencies, primarily the dollar.”

“In November, the correlation between copper and the WSJ Dollar Index reached its highest level since 2007.”

“In five hours on one day, we say (copper) prices trade in a range that would normally take a year” to play out.

  1. Bitcoin Trading Faces Greater Scrutiny in China (link)

China is trying to limit the ability of Chinese individuals and companies to move their wealth abroad, a trend that contributes to a depreciating Chinese yuan and risks destabilizing the broader financial system.”

Trump & China

If Trump stops China from dumping highly subsided products into our markets (link), I think he’ll unintentionally destroy the lynch-pin holding together China’s economy…highly subsidized factories.

To give more detail to this picture, this is what I imagine much of China’s economy looks like:

  1. China’s local governments fund themselves by land sales and real estate development. But the land is only valuable if there are people and jobs.
  2. The easiest way to create jobs is to subsidize industries which can generate LOTS of jobs, like steel production. Steel production creates jobs in mining, transportation, energy, engineering, and of course factory workers.
  3. With lots of people working, or soon to be working, demand for real estate skyrockets. This in turn creates more jobs because workers are needed to build all this new real estate.
  4. It might be ok if only a few cities in China used this model, but I believe this to be pervasive. As a result, China is creating WAY too much steel and other products.  With an oversupply of subsidized goods, they must dump them into U.S., and global markets for whatever prices they can get.

If the Trump administration stops China from dumping its highly subsidized products into the U.S., subsidized factories all over China will quickly implode and take entire cities with it.  Being so highly leveraged, China is not in a position to handle the impact of such an event.

This of course is just my hypothesis, and I welcome any disconfirming evidence.

“Retail Meritocracy” & Deteriorating Moats

It feels like we’ve entered a new area that I’d like to call “retail meritocracy”.  Brand names use to serve an important role in signaling both value and quality to consumers.  But with easy access to internet reviews and scores, brand name goodwill seems to be rapidly deteriorating for many companies.

Luxottica appears to be a good example.  Luxottica has a dominant position in the old world distribution and marketing platform of sunglasses and eyewear.  In this old model, floor space and brand names served as a solid barrier to entry.  But there’s been a trend towards commoditization of sunglasses and eyewear as consumers become more comfortable with buying off-brand names like Warby Parker.  Online reviews, ratings, etc. have weakened Luxottica’s competitive moat.

  1. Merger to Create Eyewear Giant (link)

“The merger joins two companies that previously risked stepping on each other’s toes as Luxottica expanded into lens manufacturing and Essilor moved into frames…both companies could shrink because of a harsher price competition for frames and lenses.”

  1. Why Golfers Covet the Costco Ball (link)

In another example of “retail meritocracy”, Kirkland brand golf balls became a hot selling items when it was discovered that they perform nearly as good as Titleist Pro VI golf balls.  “This is just a perception killer,”  The Kirkland golf balls retailed for $1.25/ball, while Pro VI’s retailed for ~$4/ball.

We  have entered a time of retail meritocracy where many brand-name-moats are being eroded more quickly than anticipated.

Know what’s being measured

It’s important to know what’s being measured.  Sometimes we forget.  Here are some examples:

  1. Private Prison Industry Gets Boost From Election (link)

A likely example of lying with statistics.

The DOJ found that private prisons were more dangerous than government-run facilities.

“Contractors criticized the report, saying it compared private and government-run prisons even thought they house different types of criminals.”

“The private facilities are dominated by lower-security, illegal immigrants who have committed crimes, a demographic in which gangs are prevalent.”

  1. Rocky Route for Rail Line (link)

“If you cut 30 minutes off, I’d be for it,”

Note: Nowhere in his comment does this frequent Amtrak traveler consider the $120 billion cost.

  1. Fed Officials Shift focus on Growth (link)

When the Fed and U.S. Government talk about the success of their economic programs they largely speak of 1) an increase in overall demand and 2) a reduction in unemployment.  When they say the economy is “healed”, they are likely measuring it by overall demand and unemployment numbers.

Global Growth Fuels Netflix Surge (link)

“The streaming video giant has prioritized growth over profit as it pursues its international rollout”

Success is being measured by user growth…which is the same metric used by Netflix’s competitors.  All of its competitors are foregoing profits for revenues

Oops! When Little Errors = Big Mistakes.

Two examples of little mistakes that lead to big errors.

  1. Student-Debt Picture Darkens (link)

The U.S. government WAY underestimated how many students have “defaulted on or failed to pay back their college loans.”

Previous numbers “overstated repayment rates for 99.8% of all colleges and trade schools in the country.”

“The new analysis shows that at more than 1,000 colleges and trade schools, or about a quarter of the total, at least half the students had defaulted or failed to pay down at least $1 on their debt within seven years.”

In 2015, the reported number was 347 colleges.  Today it stands at 1,029.

  1. Afghan Payroll Cut in Corruption Fight (link)

The U.S. military was paying 30,000 Afghan soldiers that didn’t exist!  That came out to $13 million per month.  Now, the U.S. military will only pay Afghan soldiers who were biometrically enrolled in the nation’s army.

The Growth Promise

Why does it seem that troubled companies always insist upon expanding into growth markets?  Why are they so eager to grow a business model with fundamental problems?  Examples include:

  1. Pearson Drops as Future Darkens (link)

“Pearson said its revenue fell 30% in the fourth quarter making for a full-year decline of 18% that it called unprecedented.”

“…which has put pressure on Pearson’s business even as it seeks new sources of growth in emerging economies such as Brazil and China.”

  1. Can Revlon Regain Some of Its Lost Luster? (link)

“One way Mr. Garcia intends to lessen Revlon’s reliance on the U.S. is by entering China.”

I’m Curious. Is this an Accounting Illusion, Real, or Both?

Railroad Mavrick Buoys Investors (link)

I’m curious about this case.  I wonder if Mr. Harrison’s operating efficiencies are real or are merely accounting related.  After all, he’s able to do what no one else in the industry is capable of doing, which should raise some questions.

“Each time the message was similar: Mr. Harrison has proved himself able to cut costs and improve operations and is a better executive than you current team.”

 Irrational Exuberance

On the backs of the second longest bull-market in history, artificially low interest rates have created intense competition among investors for any yield whatsoever.  Furthermore, ultra-low interest rates have incentivized land-lords not to sell, which has reduced supply and intensified competition further.

  1. Texas Billionaires Joined to Strike Deal (link)

Plano Texas’s raw land has gone from $8 to $10 a square foot a few years ago to $60 today.  Due to growing appeal to corporate tenants.

“The property attracted the attention of about 40 investors.”

Ultimately it was won by the investor able to secure a high loan to equity ratio.

It’s unusual for an investor group to be able to borrow such a high percentage of a deal’s value, as Mr. Ware’s group did.

Participants said it worked because the bank will get an equity like return if the group hits the “jackpot” with the new leasing and land development.

  1. Investors Pump In Cash But Supply Is Lacking (link)

Investors piling money in: “Investors are piling money into real estate funds, but fund managers are finding it challenging to spend it.”

Hunt for returns in an Ultra low interest rate environment: “The record level of dry powder comes as investors increasingly have turned to commercial real estate in a hunt for returnsUltra low interest rates at global central banks have made returns on offices and shopping malls look attractive compared with other asset classes such as bonds.

On par with 2005 to 2008: “Global fund managers have raised $446 billion for commercial property in the past four years, on par with the total raised from 2005 to 2008 in the run-up to the global financial crisis,”

Fierce competition for few properties: “With competition for deals fierce, “it has been much more challenging to invest,”…”There are very few forced sellers,”

Landlords aren’t willing to sell.  Their low debt levels and readily available bank financing have made it easy to hold on to properties longer in hopes of reaping bigger paydays later,”

Increasing demand: Deflation & Inflation

  1. ‘Rideables’ Could Curb Car Ownership (link)

Increased demand can have either an inflationary effect or a deflationary effect.  Which way it goes is largely dependent upon two factors:

1) The speed at which supply can expand to meet demand and

2) economies of scale.

In the case of electric vehicles, increasing demand has had a deflationary effect:

“…the rapid expansion of the market has led to demand for parts, making them in turn cheaper and more available, much like what happened with mobile phones.”

“batteries are getting cheaper at 4% to 8% a year, and that compounding over the last five years has had a massive impact” on the electronic-vehicle industry.

Meanwhile, increasing demand has had an inflationary effect on price of oil and gas service providers (link).

Significant Housing Developments

  1. Mortgage Lending Shift Spurs Worry Over Risk (link)

There’s been a big shift in the FHA lending market for single-family mortgage market over the past 10 years.

Topped $1 trillion:Bonds backed by certain risky single-family mortgages topped $1 trillion for the first time in November, crossing that threshold amid warnings about that corner of the U.S. housing market.”

Banks have all but stopped participating: “The result: In the first three quarters of 2016, banks accounted for 9% of mortgage dollars originated by the FHA’s top 50 lenders, versus 62% for all of 2010, according to Inside Mortgage Finance. Nonbank lenders accounted for 80% of mortgage bonds backed by single-family FHA loans in July 2016, versus 9% the same month in 2010…This is the biggest shift in mortgage lending since the savings-and-loans debacle in the 1980’s.”

“It’s too costly to originate”: “J.P. Morgan Chase & Co., the nation’s largest bank by assets, isn’t among the 50 largest FHA lenders.  In 2013, it was the third largest,”…”It simply is too costly and too risky to originate these kinds of mortgages,” Jamie Diamon wrote.

FHA share of the mortgage market has tripled: the FHA share of the overall mortgage market is larger than during the last housing boom.  In the years leading up to the housing bust, FHA loans accounted for less than 5% of annual mortgage volume.  Since the meltdown, the share has ranged from 11% to 15% of originations.

FHA loans under Ginnie Mae has Quadrupled since 2007: “That growth has boosted the amount of bonds Ginnie Mae backs. The $1 trillion of outstanding FHA single-family loans in November that it guaranteed compares with $272 billion at the end of 2007. Overall, Ginnie Mae now backs more than $1.7 trillion in bonds, which includes loans backed by other agencies such as the Department of Veterans Affairs as well as the FHA.”

Nonbank lending creates market risks: “The funding issue arises because nonbanks don’t hold deposits. So they rely on short-term financing, often from banks, mostly to originate new loans. That can dry up in stressed times.”

As Power Changes Hands, HUD Makes Swift Move (link)

The Trump administration seems likely to curb large housing affordability programs which make mortgages more accessible to lower income families, but at the same time distort free market dynamics.  This would likely put downward pressure on home prices.

Challenges Lurk in the Economy (link)

“The U.S. home ownership rate is near a 50-year low, and the average debt load for college students is rising.”

The Confidence Illusion

There’s a lot of certainty and confidence going on.  Investors are feeling much more confident, the fed is feeling much more confident, consumers are feeling much more confident, etc.  But should we trust them?  Caution would be the prudent advice.

The article, “Don’t Let Others Sway You When Making Investment Decisions” (link), points out that we can be heavily influenced by people with an intense belief in ignorant views.

“We’re biologically equipped with the potential to allow more-confident people to have greater sway over our own beliefs,”

“In a paper published in 2000, Prof. Shiller showed that confidence varies, often going up after the market rises and falling after it goes down.  The confidence of individual investors rose 4% in July 2008, for instance, right before the market got sucked into the black hole of the financial crisis.

“So you could visualize the stock market as a poltergeist or hobgoblin who takes a twisted delight in play pranks on the expectations of the investing public.”

1. Treasury Yields Resume Ascent (link)

Janet Yellen is viewing things positively.

“In a speech Thursday at Stanford University, Ms. Yellen said she doesn’t see the U.S. economy at risk of overheating and doesn’t expect growth to pick up much soon,”

But be careful to give too much weight to her comments.  Remember that after the financial crisis, Alan Greenspan wrote:

“In the run-up to the crisis, the Federal Reserve Board’s sophisticated forecasting system did not foresee the major risks to the global economy.  Nor did the model developed by the IMF, which concluded as late as the spring of 2007 that “global economic risks [had] declined” since 2006 and that “the overall U.S. economy is holding up well…[and] the signs elsewhere are very encouraging.” (link)

Service Providers with High Fixed Costs

  1. For Shale Drillers, Rising Oil Prices Also Come With Rising Costs (link)

Interesting story for a case study:

During a dramatic drop in oil prices, oil & gas companies get a sort of mini-bailout by their service providers.  These service providers effectively absorb some of the losses from oil & gas companies, thereby shielding them and making the decline more manageable.

But the effect is a two-way street.  When oil price rebound, service providers are quick to raise prices and dampen the benefits of rising prices.

Why does this happen?

The service providers have high fixed costs.  Upon declining oil prices, oil & gas companies cut demand for their services.  Because service providers have high fixed costs, they will continue to provide services at a loss, sometimes just as long as their variable costs are covered.

I believe you could say that, to some extent, the fixed costs of your service providers or suppliers act as a shield in bad times.  They will/must lower their service fees,  thereby making the hard times more tolerable.

What should we learn from this?

1) We should look at service providers and suppliers and determine the level of their fixed costs and variable costs.

2) Oil & Gas companies should really position themselves better to take advantage of a decline in oil prices.

Before the decline in oil & gas prices, the whole industry had positioned themselves aggressively.  When the crash came, no company was in a position to exploit the lower costs offered by service providers.  Or buy oil assets at discounted prices.

Instead, they all waited for a rebound in prices to start working again, at which point, they completely missed out on compelling market opportunities.

The problem with that strategy is that it’s hard to do.  But as Charlie Munger says, “It takes character to sit there with..cash and do nothing. I didn’t get to where I am by going after mediocre opportunities.”

Government Corruption & Lee Kuan Yew’s Advice

  1. Scandal Rocks Samsung (link)

“(President Park Geun-hye) was impeached last month over allegations that her confidante, Choi Soon-sil, sought to shake down the country’s biggest conglomerates for donations in exchange for political favors.”

There’s just so much corruption being exposed in governments around the world right now.  If you’re interested in learning more about the roots of corruption and how to stop it, I suggest reading the chapter “Keeping the Government Clean” from Lee Kuan Yew’s book, “From Third World to First”.  Here are a few great quotes:

“Human ingenuity is infinite when translating power and discretion into personal gain.” – Lee Kuan Yew

“A precondition for an honest government is that candidates must not need large sums of money to get elected, or it must trigger off the cycle of corruption.  The bane of most countries in Asia has been the high cost of elections.  Having spent a lot to get elected, winners must recover their costs and accumulate funds for the next election.  The system is self-perpetuating.” – Lee Kuan Yew

The Wall Street Journal Recap: January 9-15, 2017

My full notes on the Wall Street Journal from the past week: January 9-15, 2017 (Week 2).  Please Enjoy.

  1. China Troubles

    1. The End of the Asian Century: Book Review (link)
      1. “(China’s) economy is still dominated by massively indebted and usually inefficient state-owned enterprises that engage in wholesale theft of intellectual property.”
      2. …towering garbage heaps reveal the almost inconceivable environmental harm,”
      3. “There are, on average, 180,000 reported demonstrations against the regime every year.”
      4. “…nearly 50% of the country’s wealthier citizens say they plan to move overseas within five years…”
    2. McDonald’s sells Chinese restaurants to “a sprawling state-owned conglomerate that boasts a suite of financial services.” (link)
      1. “McDonald’s struggles in China as “many people have turned to cheaper local restaurant joints as China’s economy has slowed.”
        1. 51% of Chinese consumers had eaten at western fast food in 2015, down from 67% in 2012.
      2. “Getting cash out of China will be a ‘top-quality problem’“…”Previously McDonald’s reinvested most of its profit from China back into the country.”
    3. Time to Start Worrying Again About Chinese Property (link)
      1. Property prices in the Middle Kingdom surged 18% in the first 11 months.
      2. A price meltdown will hurt local governments as land sales are a major source of government revenue.
      3. The state-owned banking system is heavily exposed both (1) directly to home buyers and (2) property projects, and through (3) the use of property as collateral in business loans.
      4. Property related loans grew 25% in the first three quarters in 2016 & Mortgages grew at an even faster pace of 33%
      5. New home buyers are much more leveraged.
      6. UBS estimates the loan-to-value ratio for new home purchases at close to 70%, high by Chinese standards, where cash buyers used to be common.
      7. Some of the biggest property developers have also loaded up on debt.
    4. Chinese Insurers are aggressively selling Universal life insurance plans and aggressively investing the premiums. (link)
      1. “Chinese insurers are tapping huge amounts of cash raised from sales of newfangled investments to take big stakes in other Chinese companies and to fund international expansion.”
      2. Driven by rising sales over the internet, industry-wide insurance premium income rose 20% in 2015 to more than $370 billion and is projected to hit $700 billion by 2020
      3. “…many customers see insurance as a path to profits rather than a way to seek shelter.”
      4. “…analysts estimate that as much as a fifth of bank loans are bad.”
  2. Unintended consequences of Government Programs (These examples should give us pause the next time we think we can predict the impact of actions on a complex system.)

    1. Import tariffs on magazine paper made in Canada triggered a cascade of unintended consequences. (link)
      1. “The tariffs inadvertently hurt Maine outposts of Canadian paper producers that employ 1,200 people.”
      2. “In the end, the tariff…wasn’t a cure-all for the two American mills that advocated for it.”
      3. “You mess with the market, there are always unexpected developments.”
    2. New York providing $7 billion in subsidies to nuclear plants threatens the coal industry. (link)
      1. “Someone needs to let them know that you’re killing coal if you through billion-dollar subsidies to nuclear.” 
    3. Government loan program to bring clean energy to the masses are being hawked irresponsibly to unsophisticated homeowners. (link)
      1. “Some local governments embraced the loans as a way to bring clean energy to the masses didn’t anticipate the consequences.”
    4. The Chinese government’s escalator policy backfired.  They couldn’t foresee the negative impact of getting people to side on the right side of the escalator. (link)
      1. “Beijing and Shanghai struggled for years to convince escalator riders to stand to the right to let those in a rush pass on the left.”
      2. “Nanjing’s subway operator issued a social media post that cited statistics saying 95% of escalators experienced severe wear and tear on the right side.”
    5. The “Chicken-tax” resulting from a 1960’s trade dispute turned Mexico into an auto manufacturing powerhouse. (link)
      1. Introduced in the 1960’s, the Chicken-Tax was a 25% tax on all imported pickup trucks to the U.S. Then, in the 1990’s, NAFTA made Canada and Mexico exempt from the Chicken Tax.  Therefore, trucks could be imported from Mexico into the U.S. without incurring the tax.   Nafta, combined with the chicken-tax, opened the door for Mexico to become a dominant auto manufacturer.
    6. Afghanistan‘s “double-digit growth rates collapsed to almost zero a year after (U.S.) withdrawal.” (link) Additionally, “The Sunni Muslim terror group emerged…establishing a foothold in districts in eastern Nangarhar province.” (link)
      1. This story of the U.S. leaving Afghanistan reminds me of the British with Singapore. Except the U.S. left much more haphazardly than Britain, and there was no Lee Kuan Yew in Afghanistan to lead it out of its terrible predicament.
  3. People will exploit whatever is exploitable…and they ruin it for everybody else.  This goes for politicians, corporations, and civilians.  This should give us insight into how we design laws, oversight, incentives, etc.

    1. Politicians:
      1. Venezuelan President Nicolas Maduro is playing shady games to hold on to power. (link)
        1. Maduro described efforts to remove him as “coup plots” and blamed Venezuela’s troubles on an unexplained “economic war” waged by his political rivals.
      2. Turkish President Erdogan (link)
        1. “The aim is to bring Turkey to its knees, to take over Turkey and to distance Turkey from its goals. Therefore, they are using the foreign exchange rate as a weapon,” Mr. Erdogan said.
      3. Congo’s President Joseph Kabila refuses to leave office. (link)
      4. Columbia Holds Odebrecht Graft Suspect (link)
      5. South Africa: Corruption within the ruling ANC party. (link)
    2. Companies
      1. Car Companies
        1. VW: Pleaded Guilty to a myriad of criminal charges. (link)
        2. Fiat Chrysler : U.S. regulators accused Fiat of using software that allowed them to cheat emissions standards. (link)
        3. Renault: “French prosecutors have opened an investigation into Renault SA on suspicion of emissions fraud,” (link)
      2. Shire PLC: Drugmaker to pay $350 Million to settle allegations that it illegally promoted Dermagraft.
      3. Korean Conglomerates: Dominate Korea’s landscape and questions are abound about influence peddling. (link) (link)
      4. Takata Corp. executives.
        1. “A federal grand jury indicted three former Takata execs with conspiring to provide auto makers with misleading test reports on rupture-prone air bags…” (link)
    3. People
      1. Select Cuban immigrants abused the “wet-foot, dry-foot” policy and ruined it for everyone. (link)
        1. “Cubans themselves provoked this…it was an abuse of that privilege.”
        2. “Some Cuban-American lawmakers have soured on the policy. They say many migrants are draining U.S. benefit programs while helping prop up the Cuban government with all the cash and goods they take back to the island.”
      2. Liu Zhongtian who is allegedly shipping his wealth around the world in the form of 6% of the world’s Aluminum inventories, proving that, where there’s a will, there’s a way. (link)
  4. VW: Mission Accomplished!?

    1. In 2007 Volkswagen set a lofty goal for itself: to become the world’s largest automaker by 2018. (link)
    2. Last week it was officially announced that VW is the largest car company in the world!  Mission accomplished!…But at what cost?
    3. In the very same week VW also plead guilty to criminal wrongdoing charges that spanned from 2006 to 2015, and agreed to pay a fine of $4.3 billion. (link)
      1. The U.S. indicted six current and former executives of VW for their alleged part of the company’s U.S. emissions fraud. 
      2. VW is expected to plead guilty to charges of, Conspiring to defraud the U.S., commit wire fraud, violate the clean air at, obstruction of justice, violating import rules.
  5. Insights from Various Articles

    1. New Zealand is a perfect place for launching rockets: “A small island nation in the middle of nowhere is pretty much exactly what you want.”
    2. Valeant generated fantastic returns with the two sales they just inked (link):
      1. Bought CeraVe in 2008 for $95 million. Sold it in 2017 for $1.3 billion.  
      2. Bought Dedreon in 2015 for $500. Sold it in 2017 for $820 million.
    3. Mental Model: Consistency and Commitment
      1. “Once shoppers start buying from QVC, their habits are remarkably stead; on average, its customers have bought 24 items a year in each of the last five years.” (link)
    4. Uranium demand is declining across the globe…except for in China.
      1. “A huge fleet of reactors” are being built in China. Meanwhile Japan has backed off nuclear since Fukushima, and “plant’s are closing across the U.S. and Europe.”
    5. Germany: “With inflation picking up markedly, there is really no argument left that speaks in favor of a zero-interest rate policy,” (link)
    6. Liquidity is always there…except when you need it. “People thought that forex markets were more safe from this because they’re so liquid.  That might not be the case.” (link)
    7. Demand for U.S. mortgages is down significantly in the third quarter, in the wake of higher rates, which were up 0.82% for the quarter. (link)
      1. Mortgage applications dropped 21% from the third quarter.
      2. Refinances fell 31%.
  6. Artificial Intelligence & Technology

    1. Call Centers are using AI to know more about you. (link)
    2. Restaurant app seeks to learn your preferences. (link)
    3. Lot’s of cool possibilities with AI and self-driving cars, with one exception: Traditional auto makers, unnerved by tech competitors, are “rushing toward self-imposed deadlines to bring self-driving cars to market in the next three to four years.” They’re ‘rushing’ to do this!?  Sorry guys, you can’t can ‘fail fast’ with self-driving technology. (link)
    4. AI can be used to “spot trends and patterns that wouldn’t be evident to the sharpest data scientist.” (link)
      1. “Massachusetts General Hospital plans to use a system that draws on a database of 10 billion images to identify anomalies on medical images.”
      2. “Quickly identify cracks in jet engine blades.”
    5. India’s new digital identification system is scary. (link)
      1. “The system, which relied on fingerprints and eye scans to eventually provide IDs to all 1.25 billion Indians, is also expected to…eventually facilitate daily needs such as banking and buying tickets.”
    6. Space-Based Flight Tracking would enable real-time flight tracking over oceans. (link)
      1. It would also “give pilots greater flexibility to change routes, avoid turbulence and cut flight times.”

Funniest Quote:

“Russian pilots have some-times broken their silence when contacted by a female air-traffic controller.  In early September, a female U.S. air-surveillance officer spotted an unidentified plane approaching allied aircraft over Syria.  ‘You’re operating in the vicinity of coalition aircraft,’ she warned the pilot.  A heavy Russian accent emerged through the static: ‘You have a nice voice, lady.  Good evening.'” (link)

Strangest Photo Award:

French President Francois Hollande.

WSJ Distilled: January 7-8, 2017

Below are my full notes and highlights from the Wall Street Journal, January 7-8, 2017.

1. Examples of Standard Causes of Human Misjudgment: VW, Wells Fargo, and Theranos have each exhibited;

  • Incentive Causes Bias
  • Consistency and Commitment
  • Reinforcements
  • Is it possible Social Proof is also involved?

2. Very few funds put their money where their mouth is.  The Fulcrum Fee: “Fewer than one in 36 funds and less than $1 out of every $14 in total assets charges performance based fees.”

3. Trump Tax Plan could lead to significant inflationary pressures on consumer retail.  “Consumer apparel prices could rise as much as 15% from the tax plan”

4. Boeing: Prolonged boom since 2010 has stalled.  “Airline profits and jet purchases are closely tied to global economic growth.”

5. There’s a big increase in demand for missiles as a result of 1) ISIS 2) A reluctance to put men in the field 3) The increased precision of modern day missiles.

 The military will pay any price for extra precision: “Extreme accuracy is the difference ‘between hero and zero’ and a matter of American values. ‘You either get it exactly right, or you get it exactly wrong,’ he said. ‘In the business of modern warfare, the expectation is precision on every strike.  So through that lens, the cost factor is less of an issue.'”

6. Brokers are acting more like financial advisers: “The value-add isn’t ‘I bought a great investment’ anymore,”…”Its ‘I’m going to be your personal CFO, your adviser, and look at everything I can offer you.”

7. Extreme times call for extreme measures? To fight currency short-sellers: “Hong Kong’s overnight lending market for the Yuan jumped to 61.3% on Friday, the highest in a year and the second highest level on record.”

P.S. Why does China’s monetary policy remind me of Teddy KGB from Rounders?

“I will not be pushed around!”

“I bet it all…”

8. China takes a bite out of Apple: Apple posted its first annual revenue decline in 15 years, largely as a result of a sharp slowdown in China sales.  “Revenue in greater China, fell 17% in the fiscal year, compared with growth of 84% the prior year.”

9. Don’t find yourself in a Brazilian prison.  You won’t like it.

10. Afghanistan: Insurgents now control more territory than at any time since 2001.

11. Gen. Michael Flynn said he was fired for “speaking truth to power about the inadequacies of the nation’s national security preparedness.”

12. Standard Causes of Human Misjudgment: Government deregulation of the energy sector has led to a 20% increase in oil prices.   This has sparked Riots in Mexico resulting in 2 dead and 300 stores looted, Rioters are exhibiting cases of;

  • Deprival Super-reaction syndrome
  • Social Proof

13. Standard Causes of Human Misjudgment: Hikers are destroying cages meant to exterminate non-native predators of New Zealand birds.  These (presumably) nature-loving hikers are exhibiting;

  • Pavlovian association
  • Disliking distortion
  • Over-influence from extra-vivid evidence.
  • Poor ability to weight positives and negatives.

14. Bootleg version of Fentanyl (50 times the potency of heroin) is commonly made in China.  Leading to increase in opiod-related deaths.