cherry log to wood turned bowl

"China’s Deceptively Weak (and Dangerous) Military"

"In April 2003, the Chinese Navy decided to put a large group of its best submarine talent on the same boat as part of an experiment to synergize its naval elite. The result? Within hours of leaving port, the Type 035 Ming III class submarine sank with all hands lost. Never having fully recovered from this maritime disaster, the People’s Republic of China (PRC) is still the only permanent member of the United Nations Security Council never to have conducted an operational patrol with a nuclear missile submarine."

WSJ: "China's Suntech Power Plans U.S. Bankruptcy Filing"

"China's onetime solar-power giant Suntech Power Holdings Co. plans to file for bankruptcy protection in U.S. court as its leaders negotiate with the holders of more than $500 million in U.S. convertible bonds, according to people familiar with the matter.

Suntech plans to file for protection under Chapter 15, the section of the Bankruptcy Code that deals with international insolvencies. If recognized by a U.S. judge, the solar panel maker will receive the benefits of U.S. bankruptcy law, including the so-called automatic stay that halts lawsuits and prevents creditors from seizing assets. The filing is expected by Feb. 21, according to the people familiar with the matter."

Silver Bubble Continues to Collapse

This is great! The low last summer was 17.75 and it's back down to 18.50 today. Down more than 60 percent from the peak when all the silver bugs were hassling me in the comments section.



Absolutely grand. I'd guess the thing that would make retail commenters most irate right now would be owning ten year Treasuries. I should do an experiment on Seeking Alpha.

And the silver/gold ratio has been steadily falling. Air coming out of the speculative tire.



Finally, take a look at the ratio of the biotech ETF to the 10 year treasury ETF.



Look at that parabolic bubble with the blowoff top!!

Suntech Bond Traded at 8 Cents

New low.

"The Post Office Should Just Become a Bank"

The postal service, with public trust earned over generations and 35,000 outlets in the best real estate in practically every city in America (in fact, the report notes, 59 percent of all post offices are in “bank deserts” with only one bank branch or less), is well-positioned to deliver simple financial services. In fact, it did for over 50 years. Begun in 1911, the Postal Savings System allowed Americans to deposit cash with certain branch post offices, at 2 percent interest.

The banks in this country are not free market institutions, anyway. The majority of their capital (deposits) is government subsidized. Through the miracle of fractional reserve banking they are also allowed to make fraudulent promises to repay to their depositors.

If lending is going to be a creature of the state, you may as well split the huge rents between customers and the government. The P.O. bank idea is sound.

Of course, the ideal, honest solution is to get the government out of lending entirely. If you want to make 30 year loans you really ought to have a committed source of funds for that time period. 

Ten Year Yield Down Despite Taper

Who would've thought!

Check out this chart from StockCharts.com for IEF

"Special Opportunities Fund, Inc. Announces Redemption of Convertible Preferred Stock"

Press release:

Special Opportunities Fund, Inc. (SPE) (the “Fund”) today announced that the Fund’s Board of Directors (the “Board”) has determined to redeem all outstanding shares of the Fund’s Convertible Preferred Stock on March 3, 2014 at $50 per share. In accordance with the prospectus for the Fund’s Convertible Preferred Stock, no accrued interest will be paid.

Holders of the Fund’s Convertible Preferred Stock may, until 5 pm EST on February 28, 2014, convert their shares into shares of Common Stock at a ratio of 3.7160 common shares for each share of Convertible Preferred Stock (with cash in lieu of any fractional shares of common stock). Holders of shares of Convertible Preferred Stock that do not elect to convert by 5 pm EST on February 28, 2014 will receive $50 in cash per share. Currently, the market price of the Convertible Preferred Stock is significantly higher than $50 per share. Therefore, holders of the Fund’s Convertible Preferred Stock are advised to check the market price of both the Common Stock and the Convertible Preferred Stock before determining whether to convert their shares into common stock.

"We Win the NY Times Prize"

Mises:

"We don’t back down and apologize when we’re smeared by the state’s media. We relish it as an indication that we’re doing our job. We tell the truth about the state: its wars, its expropriations, its militarized police, its propaganda. We don’t peddle the elementary-school propaganda that the state is a public-service institution seeking the public good. We believe that the great products of civilization — indeed civilization itself — are the result of spontaneous human cooperation. The parasitic class that holds the levers of power in the state apparatus may try to condition the public to believe that central planning and threats of violence — the hallmarks of the state — deserve credit for human progress, but our scholarship proves the opposite."

Review of The Frackers by Gregory Zuckerman

It's funny - a copy of The Frackers (The Outrageous Inside Story of the New Billionaire Wildcatters) probably would have been worth a billion dollars if you'd had it in 2000. Or 2005. Now in 2014 it is not profound but worth reading to get a sense of how the onshore oil & gas industry has gotten where it is today. Some themes:

• What does an oil company have on its walls, especially in conference rooms: modern art or maps of shale plays? The best oil and gas investors that I know have their walls covered in maps. When I was following GMXR, I had maps of their acreage on my wall. I wouldn't invest with someone who owned modern art or attended Art Basel.
• The ever present recency bias, which makes it hard to imagine things being much different than the status quo. For example, Aubrey (and many of the others) knew that technology was going to allow them to drill this incredibly prolific rock. They participated in and saw everyone else engaging in a huge land rush to lease acreage. They must have realized that everyone was going to be drilling at once (during a narrow window of time) to hold (HBP) the leases. Why didn't it occur to them the effect that this would have on price? 
• Tom Ward (of Sandridge) and Aubrey born were three days apart in Oklahoma. In his January letter on luck and timing, Howard Marks mentions that the Microsoft, Sun, and Apple founders were all born 1953-1956 and that "all four founders of [M&A firm] Wachtell, Lipton, Rosen and Katz [were born] in 1930-31". As he says, "The bottom line is simple: it’s great to be in the vanguard of a new development. Talent and hard work are essential, but there’s nothing like getting there early and being pushed ahead by the powerful trends in demographics and taste that follow." Exactly. The problem for value investors is that they aren't going to get to relive Warren Buffett's life by buying Coca-Cola. For one thing, the demographics are against it.
• Also related to timing: Aubrey gets started during an oil bust. One of the conclusions of Big Rich is that wildcatters flourish during oil busts when the major oil companies create a vacuum by slashing spending.
• One reason Chesapeake ended up with a humongous land position is that they used a higher price deck (i.e. set of assumptions about future prices of natural gas). The great quote from The Shipping Man about who does deals/wins auctions applies: "[H]e who is the most bullish on the market, or has the lowest cost of capital, or has some other personal motivation for doing a deal, or ideally all three, wins the ship," or in this case, leases the land.

Giving it a 4/5 because it was a quick read.

Real Construction Spending on Religious Buildings, Per Capita, Since 2000

This was pointed out by "Stagflationary Mark." I haven't seen any public comment on it.

Latest Hussman: "Increasing Concerns and Systemic Instability"

Today.

To quote Didier Sornette:
“The underlying cause of the crash will be found in the preceding months and years, in the progressively increasing build-up of market cooperativity, or effective interactions between investors, often translated into accelerating ascent of the market price (the bubble). According to this ‘critical’ point of view, the specific manner by which prices collapsed is not the most important problem: a crash occurs because the market has entered an unstable phase and any small disturbance or process may have triggered the instability. The collapse is fundamentally due to the unstable position; the instantaneous cause of the collapse is secondary. In this sense, the true cause of a crash could be termed a systemic instability.”

Ozymandias by Percy Bysshe Shelley - Read by Ben Kingsley

Incredible: Shorting the 10 Year Bond to Hedge Stocks!

Bronte:

"Tepper outlines his short case for bonds. He is not short them because he thinks that there will be inflation (in fact he doesn't think there will be). Rather he is short them as a hedge against the consequence of the Federal Reserve trying to exit QE policies."

Wow. So the conventional wisdom is that Federal Reserve buying is maintaining the price of the 10 year treasury and helping out stock prices. Of course, we know that it actually scares holders of fixed rate debt  (inflation and dollar devaluation fear) and causes yields to be higher than they would otherwise be. 

Remember that the ten year has become a very crowded short over the past year. So this same backwards thinking is apparently totally consensus.

[I'm also astonished that someone could have had their "worst day in history" on Friday. A 2% market decline!]

"Boeing 737 -- From Cold and Dark to Ready for Taxiing"

"China Auditors Barred for Six Months for Blocking SEC Probes"

It's actually the Chinese affiliates of U.S. accounting firms that are barred,

"The auditors are caught between U.S. law, which requires them to turn over all documents requested by regulators, and Chinese law, which prohibits transferring data to foreign parties that might contain state secrets."

See the administrative law decision on these auditors released yesterday.

The Genco Fleet

Here.

"Genco Shipping & Trading Limited transports iron ore, coal, grain, steel products and other drybulk cargoes along worldwide shipping routes. Excluding Baltic Trading Limited’s fleet, we own a fleet of 53 vessels, consisting of 9 Capesize, 8 Panamax, 17 Supramax, 6 Handymax and 13 Handysize vessels, with an aggregate carrying capacity of approximately 3,812,000 dwt. In addition, our subsidiary Baltic Trading Limited, owns a fleet of 9 drybulk vessels, consisting of 2 Capesize, 4 Supramax, and 3 Handysize vessels."

The vessel maximum sizes are interesting. Here are the boxes that define the sizes of the Panamax, Suexmax, and so forth. The ships (of course) go almost all the way to the maximum: like this vessel in a Panama lock, or the USS Missouri here in the Miraflores Locks.

Bernanke Admitted That QE Isn't What Keeps Bond Yields Low

I didn't notice the speech Bernanke gave last year, called "Why are long-term interest rates so low in the United States and in other major industrial countries?".

"[W]hile central banks certainly play a key role in determining the behavior of long-term interest rates, theirs is only a proximate influence. A more complete explanation of the current low level of rates must take account of the broader economic environment in which central banks are currently operating and of the constraints that that environment places on their policy choices.



Chart 1 shows the 10-year government bond yields for five major industrial countries: Canada, Germany, Japan, the United Kingdom, and the United States. Note that the movements in these yields are quite correlated despite some differences in the economic circumstances and central bank mandates in those countries. Further, with the notable exception of Japan, the levels of the yields have been very similar--indeed, strikingly so, with long-term yields declining over time and currently close to 2 percent in each case.

Bernanke doesn't say it, but the real story here is that if you don't want deflation, you need your population to reproduce. If you have a generation that fails to push the species forward (like the baby boomers, or the low fertility generations in other countries), it seems from the chart above that you can look forward to a grinding deflation no matter what tricks the central banks pull.

Sure, their "easings" and such will cause huge stock market volatility - euphoric rallies and brutal crashes. But notice that they don't have the effects they are supposed to on interest rates. And meanwhile, the inflationists have turned the 10 year treasury into a very crowded short:

Naturally, I think the 10 year treasury is very attractive here.

Speaking of deflation, notice what has been happening to crude oil futures. For example, this is the December 2018 crude oil contract.

The futures market has crude oil declining to $75 and apparently staying there in perpetuity! I wonder, is that supply-side or demand-side?

Similarly, gold keeps declining. There is a long way to go before it hits cost - see for example the Barrick December 2013 investor presentation which shows an average "all in" cost of $660/oz at their five largest mines.

Genco Shipping's Chairman Peter C. Georgiopoulos and the Genco Augustus ($GNK)

This is right out of The Shipping Man - watch this video of Peter C. Georgiopoulos (Chairman of Genco) talk about shipping on Bloomberg TV.

The biggest ship in the Genco fleet is the 180k DWT bulk carrier Genco Augustus, built in 2007. She is currently underway in the Singapore Strait. 

Here she is coming into port in Spain:



Notice at the end when the tugs are pushing her into position - they are working hard!

When Genco bought the Augustus, she was put on a time charter with Cargill at $45,263/day. Now it looks like the market is only half of that?

People like Georgiopoulos seem to do pretty well. Look at his tan! Banks that put up the money for the ships don't seem to do as well. To say nothing of the people that lend unsecured to the shipping holding companies.

Latest Hussman

"But over the longer run, market returns turn out to be quite obedient to valuation and historically-informed discipline (as was clearly demonstrated in 2000-2002 and 2007-2009), and I expect that the most durable investment gains will be achieved by sharing that more durable nature."

Reader Question

A correspondent asks,

"My father wants to buy my son something for his 1st birthday - I assume he is thinking of something that he would consider repeating (if appropriate) every year. What do you think? What would you buy a one year-old for his birthday, if your objective was to set him on the road to financial success? Maybe this would be an interesting blog post/question? Some of your readers seem to like giving free advice!"

Project Euler

This is fun:

"A series of challenging mathematical/computer programming problems that will require more than just mathematical insights to solve."

For example:

"[F]or n with at least one small factor, trial division can be a quick way to find that small factor. For n chosen uniformly at random from integers of a given length, there is a 50% chance that 2 is a factor of n, and a 33% chance that 3 is a factor, and so on. It can be shown that 88% of all positive integers have a factor under 100, and that 92% have a factor under 1000. Thus, when confronted by an arbitrary large n, it is worthwhile to check for divisibility by the small primes."

"Bulldog Targets REITs For Shakeup After Javelin Win"

“Management doesn’t have a lot to stand on if the REIT’s stock is trading at 80 percent of its book value,” he said, referring to the amount assets would be worth if liquidated. In that scenario, every dollar of equity repurchased would yield a 20 percent return.

[...]“How hard is it to run a mortgage REIT?” Goldstein said this month in an interview. “I could run one in my basement.”

Latest Howard Marks Letter

The January 2014 memo ("Getting Lucky") is very interesting - along the lines of what we've even seeing from Bill Gross the past couple years.

I believe he's coming to terms with the fact that the market performance experienced during his career was sheer luck that isn't going to be repeated.

Marks is unusually thoughtful for an asset manager. Thus, he is the leading edge of this realization.

Latest Hussman

"We can calculate the historical errors of various valuation models in forecasting actual subsequent 7-10 year market returns. A good model should have random errors – that is, the errors should not themselves be highly predictable based on data that was readily available at the time. For the 'equity risk premium' models that Janet Yellen and Alan Greenspan often reference as evidence that stocks are not overvalued, it turns out that the errors of these models have a correlation of about 85% with profit margins that were observable at each point in time. In other words, these models make large and systematic errors because they fail to account for the cyclical variation of profit margins over time."

Suntech Short Interest Keeps Falling

At November 15, Suntech short interest was 12 million shares. By the end of the year 2013, 5.6 million of those had covered leaving 6.4 million short.

That was 29 trading days which means 193,000 per day were being covered.Volume during that time period was averaging about 0.75mm shares per day, of which short covering has apparently been an appreciable fraction.

It almost looks as though someone impatient has decided to cover their short at 50 cents, and their bid is fueling their impatience because it is propping the price up.

A Hedge With a Positive Carry

What's something that will increase in value (and liquidity) in the next panic or bear market, and has positive carry with yield higher than the S&P 500?

Answer tomorrow.

Pawn Shops For the "Rich"

From today's NYT,

"'There are more and more people who are asset rich and have a temporary liquidity problem,' said Mr. Weiss, who at 70 retains the soft Brooklyn accent of his youth. 'They’re cash constrained. We have the capital to lend up to and beyond $1 million.'"

"High end" pawn shop really ought to be an oxymoron. What a ridiculous mania we have.

Do I need to mention that if you have to borrow at double digit interest rates to own a Rolex or a Patek, you are a poseur and you are certainly not rich? More:

"The high rates are not high enough to deter client [...] who buys, renovates and sells homes in the Chicago area. He said he had gone to his bank for loans until 2008 when the process for obtaining one became onerous. After missing out on several houses, he said, he took a couple of his Rolex watches and put them up as collateral for a loan from Ultrapawn."

Perfect.

Remember, when you think about your personal financial situation, compare your highest interest rate debt (if you have any) to your least important possession or ongoing spending habit. If you have debts at 25% irr and you have a Rolex or you pay $300 for football tickets, you need to sell assets and reduce spending.

Gilder on Information and Wealth

"We begin with the proposition that capitalism is not chiefly an incentive system but an information system. We continue with the recognition, explained by the most powerful science of the epoch, that information itself is best defined as surprise: by what we cannot predict rather than by what we can. The key to economic growth is not acquisition of things by the pursuit of monetary rewards but the expansion of wealth through learning and discovery. The economy grows not by manipulating greed and fear through bribes and punishments but by accumulating surprising knowledge through the conduct of the falsifiable experiments of free enterprises. Crucial to this learning process is the possibility of failure and bankruptcy. In this model, wealth is defined as knowledge, and growth is defined as learning."

"Mr. Zhou cited personal reasons for his departure."

"Suntech Power Holdings Co., Ltd. (OTC: STPFQ) (the "Company" or "Suntech") today announced that on January 7, 2014, Mr. Weiping Zhou resigned as a director of the Company, interim Chief Executive Officer, interim Chief Financial Officer, and President with immediate effect. Mr. Zhou cited personal reasons for his departure. Suntech plans to announce new management pending final review by Suntech's board of directors and Joint Provisional Liquidators (JPLs)."

Suntech Comment Thread

Quora: "What is it like to earn a living through poker?"

In response to this Quora thread about professional poker, a correspondent writes,

"I was in the locker room at the gym I go to last week and I heard this guy complaining to a friend, literally, about a bad poker beat. He was complaining about how he had pocket Aces and couldn't get a guy to fold and the guy caught the card he needed on the river and beat him. He kept lamenting, 'He should've folded! He should've folded!' and was clearly outraged that this horrible opponent had the temerity to keep playing so badly against the expertness he represented, and that he managed to suck out and win a hand that belonged to him just because he started with the best hand.

It was tragic to listen to because I thought, 'here is a person who is still quite an amateur, but he has learned enough about the game to think he's a pro. And yet, not enough to realize he is not.' I thought about all the things that were wrong with what he was saying:

1.) Just because you START with the best hand, doesn't mean you end with it
2.) Just because you HAVE the best hand, doesn't mean you win everytime (the game is more nuanced than waiting for AA and then going all in and winning...)
3.) Rather than being UPSET at the mistakes of other players, you want to encourage them to play as idiotically and recklessly as possible; by controlling your own risk you ensure you don't get wiped out and are around to take advantage of theirs, that's the essence of good poker, and similarly, good investing

Overhearing this guy made it obvious to me how much pain we can cause ourselves by not getting the psychology right. I think where frustration comes from is expectation. And expectation is fully under our control. We can set our expectations however we want and we will always reap what we sow. I think if we're finding ourselves confused, frustrated, angry, etc., about what happened versus our expectations, we have two options: get mad at the world for the way it is, or get in touch with the way the world is. That is, learn to accept, or choose to fight.

And I think economics and physics and everything we know about truth in the world is that accepting it is the path of least resistance and that fighting reality is costly and exhausting.

The point is, and the lesson from poker here-- you can play your hand right, you can get the right hand, etc., and you can still lose the pot. It's part of the game and it should be expected. The last thing you need when you're playing poker, investing or just trying to be a human being, is to be your own worst enemy by sabotaging your own experience and emotions."

Suntech: "Court Dismisses Would-Be Class Action Against Chinese Comp"

"The U.S. District Court for the Northern District of California Dec. 26 dismissed, with leave to amend, would-be class shareholder claims that a solar energy company based in China and its former and current executives made material misrepresentations or omissions in connection with certain government bonds pledged by a third party as a part of a loan guarantee by the company that did not actually exist (Bruce v. Suntech Power Holdings Co., Ltd., N.D. Cal., No. CV 12-04061 RS, 12/26/13)."

Prechter on China

"In China, domestic credit since 2008 is up 2.5 times, from $9 trillion to $23 trillion now. In a New York Times op-ed column, 'Stumbling Toward the Next Crash,' Gordon Brown, the United Kingdom’s former prime minister, points out that this amount is more than the entire commercial banking sector of the U.S. 'China’s growth of credit is now faster than Japan’s before 1990 and America’s before 2008, with half that growth in the shadow- banking sector.' What’s the shadow-banking sector? Basically, it’s loan sharking. 'I am a loan shark but a legal one,' explains one 'shadow banker' who charges rates of up to 50% a year to 'debt-hungry businesses and households' whose borrowing otherwise has been reined in by new government restrictions. With past-due loans at 9.1% and the real estate market cooling, the banker reports that he 'is expanding his microfinance business' with loans for weddings, car purchases, small businesses and down payments on apartments. The base of the debt pyramid continues to expand, but its stagnant core and the impossible demands it is placing on increasingly implausible borrowers reveal that it cannot do so for long."

The Etruscan Forgery - The Style of Your Own Time is Always Invisible

The story of the Etruscan forgery,

"Hugh liked to tell the story of a statue that had been exposed as a forgery. In the nineteenth century, it had been passed off as an ancient Etruscan sculpture; but in the twentieth century a sharp critic had detected its recent origin. How? The forger had endowed it with the ancient Etruscan mannerisms he could see; but also, unconsciously, with the nineteenth-century mannerisms he couldn’t see. His contemporaries couldn’t see them either, so for a while the counterfeit succeeded. But as fashions changed, those nineteenth-century mannerisms 'rose to visibility.'

As Kenner put it, 'The style of your own time is always invisible.' This was a favorite moral of his. You have to be alert for the unconscious assumptions you share with your own era. Conservatives and radicals, thinking themselves opposites, may actually share the same prejudices without being aware of them."

Latest Hussman

Sunday's comment:

"Given the unfortunate resolution of similarly extreme overvalued, overbought, overbullish, rising-yield periods in history, it's almost mind-boggling that investors actually expect the present speculative run to end well. The accelerating pitch and shallowing corrections of the recent advance are worth noting. As I wrote about the oil market in July 2008 as prices raced toward $150 a barrel (see The Outlook for Inflation and the Likelihood of $60 Oil) 'Geek's Rule o' Thumb: When you have to fit a sixth-order polynomial to capture price history because exponential growth is too conservative, you're probably close to a peak.'"

Valueprax: Notes on Buffett Partnership Letters 1957-1970

"Buffett did not ignore broad market valuations. And not only did he not ignore them, he actively manipulated his portfolio in response to them."

NYT: "Another Worryingly Low Inflation Rate for the Euro Zone"

The deflation "mystery".

"The European Central Bank seeks to keep price growth steady at about 2 percent. The situation now, in which the rate of inflation is falling, is known as disinflation. If the situation continues in this direction, Europe could face outright deflation..."

The US and EU will probably respond to deflation like Japan, with huge devaluation schemes that do nothing yet trigger unpredictable stock market rallies of 50-100%.

Chan: "How would a sociopath fleece investors in oil and gas?"

Answer: inflating reserve valuations. He has a concept called "promotion-friendly properties;" those where it takes longer for the rubber to meet the road:

"One idea is to sell flawed properties to investors who don’t understand the flaws. As far as I can tell, there aren’t too many flawed properties in the oil and gas world compared to mining. Oil and gas assets in Egypt, Argentina, etc. are flawed due to the political risk. Other reserves are stranded in areas without the right infrastructure to properly process or transport/export the hydrocarbons.

Another idea is to take on oil and gas projects which won’t have cash flow until years later. Deepwater E&P has lengthy timelines and resembles mining in some ways. The projects have high risk and can take several years before they come into production. A stock promoter can sell inflated promises about the future. It will take years before investors realize that these projections about the future were overly optimistic."

Trades in Suntech Bonds

Pretty decent volume today at ~12 cents.