Edge and Odds

The enemy of knowledge is not ignorance, it’s the illusion of knowledge (Stephen Hawking)

It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so (Mark Twain)

Edge and Odds

Invest with smart knowledge and objective odds

Month: March 2015

Bearnobull’s Weekender

MR. MARKET, AT YOUR SERVICE

Ben Graham, my friend and teacher, long ago described the mental attitude toward market fluctuations that I believe to be most conducive to investment success. He said that you should imagine market quotations as coming from a remarkably accommodating fellow named Mr. Market who is your partner in a private business. Without fail, Mr. Market appears daily and names a price at which he will either buy your interest or sell you his. Even though the business that the two of you own may have economic characteristics that are stable, Mr. Market’s quotations will be anything but. For, sad to say, the poor fellow has incurable emotional problems. At times he feels euphoric and can see only the favorable factors affecting the business. When in that mood, he names a very high buy-sell price because he fears that you will snap up his interest and rob him of imminent gains. At other times he is depressed and can see nothing but trouble ahead for both the business and the world. On these occasions he will name a very low price, since he is terrified that you will unload your interest on him.

Mr. Market has another endearing characteristic: He doesn’t mind being ignored. If his quotation is uninteresting to you today, he will be back with a new one tomorrow. Transactions are strictly at your option. Under these conditions, the more manic-depressive his behavior, the better for you. But, like Cinderella at the ball, you must heed one warning or everything will turn into pumpkins and mice: Mr. Market is there to serve you, not to guide you. It is his pocketbook, not his wisdom, that you will find useful. If he shows up some day in a particularly foolish mood, you are free to ignore him or to take advantage of him, but it will be disastrous if you fall under his influence. Indeed, if you aren’t certain that you understand and can value your business far better than Mr. Market, you don’t belong in the game. As they say in poker, “If you’ve been in the game 30 minutes and you don’t know who the patsy is, you’re the patsy.”

… [A]n investor will succeed by coupling good business judgment with an ability to insulate his thoughts and behavior from the super-contagious emotions that swirl about the marketplace. In my own efforts to stay insulated, I have found it highly useful to keep Ben’s Mr. Market concept firmly in mind.

Warren Buffett’s Letter to Shareholders, 1987 Berkshire Hathaway Annual Report (via Raymond James’ Jeffrey Saut)

The Fuzzy, Insane Math That’s Creating So Many Billion-Dollar Tech Companies Startups achieve astronomical valuations in exchange for protecting new investors

(…) Here’s the secret to how Silicon Valley calculates the value of its hottest companies: The numbers are sort of made-up. For the most mature startups, investors agree to grant higher valuations, which help the companies with recruitment and building credibility, in exchange for guarantees that they’ll get their money back first if the company goes public or sells. They can also negotiate to receive additional free shares if a subsequent round’s valuation is less favorable. Interviews with more than a dozen founders, venture capitalists, and the attorneys who draw up investment contracts reveal the most common financial provisions used in private-market technology deals today.

The backroom agreements are becoming more common as tech companies stay private longer, according to the interviews and financial documents obtained by Bloomberg Business. The practice obfuscates the meaning of a valuation, which can become dangerous down the road because private investors aren’t taking the same risks a public-market shareholder would. (…)

“These big numbers almost don’t matter,” says Randy Komisar, a partner at venture firm Kleiner Perkins Caufield & Byers. “Those numbers are just a middling shot at a valuation, and then it’s adjusted later” through various legal techniques, if an earlier valuation was too high, he says. (…)

Buried in their corporate filings, startups tuck away all sorts of provisions that reward investors for accepting these mega-valuations. The practice is more regular and egregious in financing rounds for mature companies. Their capital requirements tend to be much larger, so they must turn to more sophisticated investment firms that demand these kinds of terms. Startups that are generous with these guarantees can garner much higher valuations.

Each provision covers different ways to make sure new investors get paid back, even if disaster strikes, if an initial public offering gives the company a market cap far less than its private number, or, more commonly, if the startup has to raise money again at a lower valuation. One stipulation, called senior liquidation preference, ensures that a certain group gets its money back before anyone else, including employees. Another class, called downside protection or ratchets, automatically grants additional shares in the event of a declining valuation, removing a great deal of risk that the stake will ever lose value. (…)

Self driving cars and the weekly roundup in tech and retail by Leah Grace
Justice, capitalism and progress: Paul Tudor Jones II at TED2015

Can capital be just? As a firm believer in capitalism and the free market, Paul Tudor Jones II believes that it can be. Jones is the founder of the Tudor Investment Corporation and the Tudor Group, which trade in the fixed-income, equity, currency and commodity markets. He thinks it is time to expand the “narrow definitions of capitalism” that threaten the underpinnings of our society and develop a new model for corporate profit that includes justness and responsibility.

I suppose Tudor Jones dedicated his presentation to the over-greedy bankers, investment bankers and money managers of this world…How about adding Professional, Moral, Ethical and Responsible behaviour to his speech and hope these guys understand?

Among too many:

(…) The most recent example comes to us from the “Evolution” Darknet, which according to a report from Crytpo Coins News shut down their web server and ran off with $12 million in user bitcoins. (…)

The operators of Evolution did leave a note for their users letting them know what happened to the money. As you might expect, the $12 million in bitcoins that have been disappeared will be shared among the former admins of Evolution, with the operator of the site claiming he’s headed to the Caribbean to enjoy his profits:

Due to unforseen events I decided to close down Evolution Marketplace. We want to thank you guys for you effort and help making this the most profitable and popular marketplace. This wasn’t an easy decision but due to other marketplaces getting shut down and the forum going downhill I decided to cut my ties and exit with an eight figure profit. The millions from evo will be divided up amongst the mods a few admin and members. Since this is such an abundance of money I may consider buy ins from former evo members in exchange for 1k bitcoinis. I’ll be around around for a short period of time before permanently moving to the caribbeans, I hope you guys understand.

“Evolution Marketplace”! Evolution is not always progress…

The bank fired Carl Bonde after discovering that he had been exaggerating his trading performance, according to the person. Mr. Bonde, who declined to comment, traded inflation derivatives at the bank’s New York office. The bank also fired Mr. Bonde’s boss, Keith Price, for failure to supervise.

Somebody must have made this up. Bonde inflated his numbers trading inflation derivatives. Eventually, his boss paid the price.

NEW$ & VIEW$ (20 MAR. 2015): No recession in sight; Housing rebound?

Conference Board Leading Economic Index Remains in Growth Territory

The Conference Board LEI for the U.S. improved again in February, driven mostly by positive contributions from the financial components and building permits. In the six-month period ending February 2015, the leading economic index increased 2.4 percent (about a 5.0 percent annual rate), slower than the growth of 3.7 percent (about a 7.5 percent annual rate) during the previous six months. In addition, the strengths among the leading indicators have remained widespread.

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Philly Fed Business Outlook: Modest Growth, A Bit Below Expectations

Manufacturing activity in the region increased at a modest pace in March, according to firms responding to this month’s Manufacturing Business Outlook Survey. The survey’s current indicators for general activity and new orders were positive and remained near their low readings in February. Firms reported overall declines in shipments and in work hours, while overall employment increased only slightly. Firms reported more widespread price reductions in March, although most firms continued to report steady prices.

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Sad smile Components were generally quite weak:

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U.S. HOUSING
5 Things Lennar’s Results Tell Us About the New-Home Market Lennar Corp.’s quarterly results on Thursday depict a new-home market shifting into a higher gear so far this year, perhaps finally shaking off last year’s doldrums.

(…) “An early read from this spring selling season suggests that the market is continuing to improve at a very steady pace,” Lennar Chief Executive Stuart Miller said Thursday. Less restrained was RBC Capital Markets analyst Robert Wetenhall Jr. “This is the start of the best spring selling season of the past five years,” he said. (…)

Lennar’s increase in its average closing price slowed to a 3.2% year-over-year gain in its first quarter from a 17.5% gain in the previous year. Overall, that might mean buyers are fed up with big price hikes. It likely also signals that builders are constructing a greater number of less-expensive homes. (…)

In its fiscal first quarter, Lennar provided an average of $21,800 per home in freebies, which amounts to 6.3% of home-sales revenue. That’s about the same as the $21,300, or 6.3%, that it provided in incentives a year earlier. And it’s well less than Lennar’s incentives in the more trying times of 2012. (…)

Lennar sold 520 homes in the Houston area in its first quarter, a 7% decline from a year earlier. Its average price there was flat from a year ago at $280,000. TRI Pointe Homes Inc. said this month that its sales in Houston in the first two months of this year are down 10% to 15% from a year earlier. (…)

Now Lennar is experimenting with building single-family homes for rent. (…)

These CalculatedRisk charts are not signalling “the best spring selling season” just yet:

(…) In 21 of the 50 biggest U.S. housing markets, the number of borrowers who owe more on their homes than the homes are worth increased during the fourth quarter, according to a report to be released Friday by Zillow Group Inc., a real-estate information company.

Nationwide, the picture got better, but only marginally so. About 16.9% of all mortgaged homes were underwater in the fourth quarter, down 0.1 percentage point from the third quarter. Zillow said the normal share of underwater borrowers is generally thought to be around 5%. (…)

The problem, Zillow said, is that while average home prices are rising, the low end of the market is seeing values fall. More than 27% of homes with values in the bottom third of their market were underwater in the fourth quarter. In Detroit and Atlanta, about half of such homes were underwater. (…)

CHINA ECONOMY:

Key macroeconomic indicators such as industrial production indicate that economic activity in China experienced a sharp slowdown in the months of January and February. However, CEBM’s proprietary Composite Economic Performance Index synthesizing total social financing (TSF, 36%), electricity generation (30%), railway freight (30%) and securities market transaction volume (4%) indicates that the deterioration in activity was not as bad as that reflected by popular macro indicators.

Among the four sub-indices of the composite index, only railway freight deteriorated significantly during the first two months of the year, most likely reflecting seasonal factors rather than a cyclical decline, while the other three sub-indices all trended up compared to the trough in mid 2014. In addition, as global commodities prices rebounded in February and the Lunar New Year is expected to continue to have a distortive effect on economic activity in March, we expect GDP to grow at around 7.1% in 1Q15 and remain stable at 7.0% in 2Q15.

Beijing Helps Yuan Climb Against Dollar China’s yuan scored its best week in over seven years, as Beijing steps in to the markets to drive the currency higher and kick out speculators betting on losses.

The yuan gained 0.9% against the U.S. dollar since Monday, with the currency touching a three-month high Friday before slipping back to end at 6.2062 per dollar. The central bank has been setting a morning reference rate higher most days while traders say Chinese state banks are also buying the currency to shore up its value.

The sudden gains have taken traders by surprise after four months of losses, serving as a reminder that Beijing still keeps a firm grip on the tightly-controlled currency and won’t allow heavy losses or one-way speculation. Capital has also been flowing out of China this year as the yuan weakens and worries linger that further currency losses could exacerbate that and destabilize the already fragile financial system. (…)

The surprise intervention is a reversal from last year when China’s central bank engineered an unexpected wave of yuan depreciation, forcing an unwinding of billions of dollars in highly leveraged bets on the currency’s appreciation. Back then, Beijing was also concerned that overseas cash was flooding its economy with excess funds and contributing to asset appreciation, such as in property prices. (…)

The yuan’s gains this week though signal China may not be eager to be part of a trend where central banks around the world are taking moves to weaken their currencies to help boost exports. Severe devaluation would hurt China’s goal of rebalancing the economy away from relying on exporters and more toward domestic consumption, while Beijing is also trying to have the yuan used more broadly abroad. (…)

Iran Talks Stall Over Ending of Sanctions As negotiators press toward an agreement constraining Tehran’s nuclear program by the March 31 deadline, Tehran wants U.N. sanctions lifted right away. The U.S. and Europeans say ‘no way.’

(…) The U.S. and its European allies are demanding the U.N.’s sanctions be suspended or terminated in a phased time-frame over years. (…)

The Iranians “say it’s a deal breaker. They don’t want it at all,” said a senior European diplomat involved in the Lausanne talks, referring to Iran’s position on the U.N. sanctions. “There’s no way that we would give up on that…. No way.”

The official said it would take much more than a year or two for U.N. sanctions to be lifted.

“If you’re talking about the IAEA certifying that the Iranian program is clean, I think it will take years by any measure,” the European official said. U.S. officials on Thursday voiced the same position. (…)

Pointing up There is wide agreement that many of the unilateral sanctions the U.S. and European Union imposed on Iran could start to be suspended within months, if not weeks, of a deal being stuck.

This would boost Iran’s economy as the EU could resume purchasing oil from Iran and restrictions on Iranian banks could be lifted. Iran could also begin repatriating some of the over $100 billion in oil revenue frozen in overseas accounts. (…)

U.S. officials said the diplomacy could continue through the weekend in a bid to make the March 31 deadline. Others warned it may simply be impossible to meet the deadline.

“I don’t think we have made sufficient progress,” the European official said. “A lot of issues remain on the table.” (…)