Archives for February 2014

What is Really in HP Acthar Gel?

What is Really in HP Acthar Gel?

Courtesy of Citron Reports 

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Questcor (NASDAQ:QCOR) has been a battleground stock for years.  Bulls have stood by the strong financial performance of the company, while bears have been clinging to the threat of multiple government investigations and lack of clinical data for this “magical” $30,000 per vial drug.

 

THAT HAS ALL NOW CHANGED

Today Citron puts that entire debate in an entirely new light. The entire debate is now reduced to just one single relevant question … nothing else matters.

 

What is in that $30,000 vial? You will be shocked when you find out.

Citron presents the findings of a compelling scientific inquiry from some of the nation’s pre-eminent analytical laboratories. These results, which have already been presented to the FDA, seek an answer to the one question that neither the longs nor the shorts has ever really known:

What is Really in HP Acthar Gel?

Click here for the full story:

 

Bitcoins, Murder-for-Hire, 28-Year Old Pie Makers: Welcome to the New World of Banking

Courtesy of Pam Martens.

Cameron (left) and Tyler Winklevoss Testifying at a Virtual Currency Hearing on January 28, 2014

Mark Karpeles, a 28-year old Frenchman and the head of the now shuttered Bitcoin web site Mt. Gox, where customers are said to have lost hundreds of millions of dollars, may be a very talented software developer and entrepreneur, but what he clearly is not is a competent banker; and yet, he was allowed to accept large quantities of deposits of money from the public.

Mt. Gox, a purveyor of the virtual currency, Bitcoin, held no banking license or bank charter in the U.S. It had no FDIC insurance guaranteeing the deposits. There were no bank examiners periodically checking the books to be certain the deposits were safe. And yet, according to the chart below from Alexa, it may be U.S. citizens who suffered the largest losses.

Alexa ranks sites by traffic from around the globe. Despite the fact that Karpeles was based in Tokyo, the largest percentage of his traffic was coming from the United States.

Concerns about virtual currencies such as Bitcoin have grown by U.S. regulators since October of last year when the U.S. Department of Justice shut down an outfit called Silk Road which was involved in both Bitcoins and an effort at murder-for- hire. Mythili Raman, Acting Assistant Attorney General of the Criminal Division of the Justice Department, testified as follows on November 18 of last year to the U.S. Senate Committee on Homeland Security and Governmental Affairs:

“…the Department took action against one of the most popular online black markets, Silk Road.  Allegedly operated by a U.S. citizen living in California at the time of his arrest, Silk Road accepted Bitcoins exclusively as a payment mechanism on its site.  The Department’s complaint alleges that, in less than three years, Silk Road served as a venue for over 100,000 buyers to purchase hundreds of kilograms of illegal drugs and other illicit goods from several thousand drug dealers and other criminal vendors.  The site also purportedly laundered the proceeds of these transactions, amounting to hundreds of millions of dollars in Bitcoins.  In addition to arresting the site’s operator and shutting down the service, the Department to date has seized over 170 thousand Bitcoins, valued as of this past Friday, November 15, 2013, at over $70 million. A separate indictment charges Silk Road’s operator with drug distribution conspiracy, attempted witness murder, and using interstate commerce facilities in the commission of murder-for-hire.  With regard to the murder-related charges, the indictment alleges that the Silk Road operator paid an undercover federal agent to murder one of the operator’s employees.”

Continue Here

Meanwhile, More Russian Military Vehicles Amass in the Crimean

Courtesy of ZeroHedge. View original post here.

Submitted by Tyler Durden.

While the IMF is promising a massive bailout to the Ukraine, and NATO is using the harshest language it can possibly muster to halt Russia in its tracks, Putin is doing what he does best: employing brute force (as seen below), and using even harsher language, to wit: RUSSIA: WEST MUST STOP MAKING PROVOCATIVE STATEMENTS ON UKRAINE.

In photos:

 

And clips:

Source: Euronews

Job Creation and Destruction: Do Small, Medium, or Large Corporations Account for Job Growth?

Courtesy of Mish.

The hunt for jobs is on. But where is the job growth? Is job growth in small, medium, or large corporations?

Unfortunately, that question is insufficient to answer the question. One must also factor in job destruction, the closing of businesses.

With that in mind, please consider the Wall Street Journal report: Say It Together: Young Businesses, Not Small Ones, Drive Job Growth

It’s not size that matters — at least when it comes to job creation. The age of the company is a bigger factor.

The Federal Reserve Bank of Chicago’s Jason Faberman on Monday became the latest in a long line of economists to unpack the misconception – promoted frequently by elected officials — that small businesses are the key to creating new jobs in the U.S.

It’s a subset of small firms—young, innovative companies—that lead in job creation. “It’s the new guys, not necessarily the small guys, that generate growth,” he said at the National Association for Business Economics policy conference in Arlington, Va. “The focus for policymakers shouldn’t be on small business job growth, but on new business formation.”

Nearly 90% of U.S. firms employ 19 or fewer workers. Those smaller firms create jobs at nearly twice the rate of larger companies. Controlling for the age of the firm, Mr. Faberman found the strongest job growth came from firms that were less than four years old.

Small or Large vs. New

The above article says job growth is not small vs. large, but rather old vs. new.

But how do you get to be new and growing enough to matter?

Job Creation and Destruction by Firm Age and Size

To help answer the question, please consider the following interactive map from Tableau  Software.

Continue Here

Buffett’s annual letter: What you can learn from my real estate investments

Outside the Box: Buffett’s annual letter: What you can learn from my real estate investments

By John Mauldin

It does not hurt to be reminded once in a while about what it means to be a “true investor,” and who better to remind us than Warren Buffett? Today’s Outside the Box comes to us from the pages of Fortune magazine (hat tip to my good friend Tom Romero of Capital Research Partners, who is a pretty fair investor in his own right).

Fortune seems to have had the inside scoop on Mr. Buffett’s pronouncements over the years. I still keep some old Fortune magazines with interviews of Mr. Buffett to remind myself about the basics. For whatever reason I was up at 5 o’clock this morning and began reading this piece, and it functioned just as well as coffee as a wake-up call.

Warren starts off by telling us the stories of two relatively minor real estate investments he made, one in the ’80s and the other in the ’90s, but where he’s going is straight to the heart of some fundamental investing principles.

Most of us get all wrapped up, from time to time, in the daily or weekly movements of our investments; but Warren wants us to remember that “Games are won by players who focus on the playing field – not by those whose eyes are glued to the scoreboard. If you can enjoy Saturdays and Sundays without looking at stock prices, give it a try on weekdays.”

Easier said than done; but he’s right, of course. Now, it’s certainly OK dwell at length on the macroeconomic big picture, right? I mean, that’s half my fun most days! No, says Warren,

Forming macro opinions or listening to the macro or market predictions of others is a waste of time. Indeed, it is dangerous because it may blur your vision of the facts that are truly important. (When I hear TV commentators glibly opine on what the market will do next, I am reminded of Mickey Mantle's scathing comment: “You don't know how easy this game is until you get into that broadcasting booth.”)

So Warren wants our feet planted squarely on the field of play; he doesn’t want us up in the stands or, heaven forbid, watching the game on TV. And forget reading some commentator’s analysis of yesterday’s game or his take on the rest of the season!

Well, OK. So if this is the last Outside the Box or Thoughts from the Frontline you ever read, at least I got you this far, right?

But read on, and be sure not to miss Warren’s very pithy (and timely!) quotation from the late Barton Biggs.

And let me point out that when Warren suggests a future portfolio of 90% S&P index funds, he is talking about very, very long-term portfolio design and not something that retirees who need income or have a shorter-term focus (less than multiple decades) should be thinking about.

And to be fair, Buffet’s process of choosing which investments to put into his portfolio would not allow him to end up with very many components of the S&P 500. So I don’t share his bias against active management, though I have to agree that most of what passes for active management is problematic. But there is a lot we need to remember and ponder in Buffett’s Benjamin Graham old-style value investing.

I have never met the man, but I would like to. I think we might have more in common than some readers would imagine. Including hamburgers.

Today I’m flying to Los Angeles, where I will speak tonight and tomorrow for my partners at Altegris Investments. I am particularly looking forward to spending time with Jack Rivkin. I always learn a lot. Then I get on a plane to fly all the way across the country to Miami. I will be speaking for my close friend Darrell Cain at his annual conference as well as spending time with Pat Cox, who is going to come over from the West Coast of Florida. I hope to get a good part of this weekend’s letter done on the flight.

Then it’s on to Washington DC for a series of meetings. George Gilder is flying down from Boston and has offered to introduce me to a few of his friends, and I will do the same for him. We will hopefully be sitting down for a video in which we’ll discuss some mutually interesting ideas, as well as share a dinner or two where we’ll talk about a variety of policies with a few people who are perhaps in positions to do something about them.

Packing for a week in a variety of different climates is always an interesting process. And keeping up with my reading and writing and gym time and, most importantly, friend time will make for a very busy next seven days. You make sure you enjoy yourself. Now let’s see what Warren has to tell us about investing.

Your thinking a lot about portfolio strategy lately analyst,

John Mauldin, Editor
Outside the Box
subscribers@mauldineconomics.com

 

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Buffett’s annual letter: What you can learn from my real estate investments

This story is from the March 17, 2014 issue of Fortune.

February 24, 2014: 5:00 AM ET

In an exclusive excerpt from his upcoming shareholder letter, Warren Buffett looks back at a pair of real estate purchases and the lessons they offer for equity investors.

By Warren Buffett

“Investment is most intelligent when it is most businesslike.”
–Benjamin Graham, The Intelligent Investor

It is fitting to have a Ben Graham quote open this essay because I owe so much of what I know about investing to him. I will talk more about Ben a bit later, and I will even sooner talk about common stocks. But let me first tell you about two small non-stock investments that I made long ago. Though neither changed my net worth by much, they are instructive.

This tale begins in Nebraska. From 1973 to 1981, the Midwest experienced an explosion in farm prices, caused by a widespread belief that runaway inflation was coming and fueled by the lending policies of small rural banks. Then the bubble burst, bringing price declines of 50% or more that devastated both leveraged farmers and their lenders. Five times as many Iowa and Nebraska banks failed in that bubble’s aftermath as in our recent Great Recession.

In 1986, I purchased a 400-acre farm, located 50 miles north of Omaha, from the FDIC. It cost me $280,000, considerably less than what a failed bank had lent against the farm a few years earlier. I knew nothing about operating a farm. But I have a son who loves farming, and I learned from him both how many bushels of corn and soybeans the farm would produce and what the operating expenses would be. From these estimates, I calculated the normalized return from the farm to then be about 10%. I also thought it was likely that productivity would improve over time and that crop prices would move higher as well. Both expectations proved out.

I needed no unusual knowledge or intelligence to conclude that the investment had no downside and potentially had substantial upside. There would, of course, be the occasional bad crop, and prices would sometimes disappoint. But so what? There would be some unusually good years as well, and I would never be under any pressure to sell the property. Now, 28 years later, the farm has tripled its earnings and is worth five times or more what I paid. I still know nothing about farming and recently made just my second visit to the farm.

In 1993, I made another small investment. Larry Silverstein, Salomon’s landlord when I was the company’s CEO, told me about a New York retail property adjacent to New York University that the Resolution Trust Corp. was selling. Again, a bubble had popped – this one involving commercial real estate – and the RTC had been created to dispose of the assets of failed savings institutions whose optimistic lending practices had fueled the folly.

Here, too, the analysis was simple. As had been the case with the farm, the unleveraged current yield from the property was about 10%. But the property had been undermanaged by the RTC, and its income would increase when several vacant stores were leased. Even more important, the largest tenant – who occupied around 20% of the project’s space – was paying rent of about $5 per foot, whereas other tenants averaged $70. The expiration of this bargain lease in nine years was certain to provide a major boost to earnings. The property’s location was also superb: NYU wasn’t going anywhere.

I joined a small group – including Larry and my friend Fred Rose – in purchasing the building. Fred was an experienced, high-grade real estate investor who, with his family, would manage the property. And manage it they did. As old leases expired, earnings tripled. Annual distributions now exceed 35% of our initial equity investment. Moreover, our original mortgage was refinanced in 1996 and again in 1999, moves that allowed several special distributions totaling more than 150% of what we had invested. I’ve yet to view the property.

Income from both the farm and the NYU real estate will probably increase in decades to come. Though the gains won’t be dramatic, the two investments will be solid and satisfactory holdings for my lifetime and, subsequently, for my children and grandchildren.

I tell these tales to illustrate certain fundamentals of investing:

•You don’t need to be an expert in order to achieve satisfactory investment returns. But if you aren’t, you must recognize your limitations and follow a course certain to work reasonably well. Keep things simple and don’t swing for the fences. When promised quick profits, respond with a quick “no.”

•Focus on the future productivity of the asset you are considering. If you don’t feel comfortable making a rough estimate of the asset’s future earnings, just forget it and move on. No one has the ability to evaluate every investment possibility. But omniscience isn’t necessary; you only need to understand the actions you undertake.

•If you instead focus on the prospective price change of a contemplated purchase, you are speculating. There is nothing improper about that. I know, however, that I am unable to speculate successfully, and I am skeptical of those who claim sustained success at doing so. Half of all coin-flippers will win their first toss; none of those winners has an expectation of profit if he continues to play the game. And the fact that a given asset has appreciated in the recent past is never a reason to buy it.

•With my two small investments, I thought only of what the properties would produce and cared not at all about their daily valuations. Games are won by players who focus on the playing field – not by those whose eyes are glued to the scoreboard. If you can enjoy Saturdays and Sundays without looking at stock prices, give it a try on weekdays.

•Forming macro opinions or listening to the macro or market predictions of others is a waste of time. Indeed, it is dangerous because it may blur your vision of the facts that are truly important. (When I hear TV commentators glibly opine on what the market will do next, I am reminded of Mickey Mantle’s scathing comment: “You don’t know how easy this game is until you get into that broadcasting booth.”)

My two purchases were made in 1986 and 1993. What the economy, interest rates, or the stock market might do in the years immediately following – 1987 and 1994 – was of no importance to me in determining the success of those investments. I can’t remember what the headlines or pundits were saying at the time. Whatever the chatter, corn would keep growing in Nebraska and students would flock to NYU.

There is one major difference between my two small investments and an investment in stocks. Stocks provide you minute-to-minute valuations for your holdings, whereas I have yet to see a quotation for either my farm or the New York real estate.

It should be an enormous advantage for investors in stocks to have those wildly fluctuating valuations placed on their holdings – and for some investors, it is. After all, if a moody fellow with a farm bordering my property yelled out a price every day to me at which he would either buy my farm or sell me his – and those prices varied widely over short periods of time depending on his mental state – how in the world could I be other than benefited by his erratic behavior? If his daily shout-out was ridiculously low, and I had some spare cash, I would buy his farm. If the number he yelled was absurdly high, I could either sell to him or just go on farming.

Owners of stocks, however, too often let the capricious and irrational behavior of their fellow owners cause them to behave irrationally as well. Because there is so much chatter about markets, the economy, interest rates, price behavior of stocks, etc., some investors believe it is important to listen to pundits – and, worse yet, important to consider acting upon their comments.

Those people who can sit quietly for decades when they own a farm or apartment house too often become frenetic when they are exposed to a stream of stock quotations and accompanying commentators delivering an implied message of “Don’t just sit there – do something.” For these investors, liquidity is transformed from the unqualified benefit it should be to a curse.

A “flash crash” or some other extreme market fluctuation can’t hurt an investor any more than an erratic and mouthy neighbor can hurt my farm investment. Indeed, tumbling markets can be helpful to the true investor if he has cash available when prices get far out of line with values. A climate of fear is your friend when investing; a euphoric world is your enemy.

During the extraordinary financial panic that occurred late in 2008, I never gave a thought to selling my farm or New York real estate, even though a severe recession was clearly brewing. And if I had owned 100% of a solid business with good long-term prospects, it would have been foolish for me to even consider dumping it. So why would I have sold my stocks that were small participations in wonderful businesses? True, any one of them might eventually disappoint, but as a group they were certain to do well. Could anyone really believe the earth was going to swallow up the incredible productive assets and unlimited human ingenuity existing in America?

When Charlie Munger and I buy stocks – which we think of as small portions of businesses – our analysis is very similar to that which we use in buying entire businesses. We first have to decide whether we can sensibly estimate an earnings range for five years out or more. If the answer is yes, we will buy the stock (or business) if it sells at a reasonable price in relation to the bottom boundary of our estimate. If, however, we lack the ability to estimate future earnings – which is usually the case – we simply move on to other prospects. In the 54 years we have worked together, we have never forgone an attractive purchase because of the macro or political environment, or the views of other people. In fact, these subjects never come up when we make decision.

It’s vital, however, that we recognize the perimeter of our “circle of competence” and stay well inside of it. Even then, we will make some mistakes, both with stocks and businesses. But they will not be the disasters that occur, for example, when a long-rising market induces purchases that are based on anticipated price behavior and a desire to be where the action is.

Most investors, of course, have not made the study of business prospects a priority in their lives. If wise, they will conclude that they do not know enough about specific businesses to predict their future earning power.

I have good news for these nonprofessionals: The typical investor doesn’t need this skill. In aggregate, American business has done wonderfully over time and will continue to do so (though, most assuredly, in unpredictable fits and starts). In the 20th century, the Dow Jones industrial index advanced from 66 to 11,497, paying a rising stream of dividends to boot. The 21st century will witness further gains, almost certain to be substantial. The goal of the nonprofessional should not be to pick winners – neither he nor his “helpers” can do that – but should rather be to own a cross section of businesses that in aggregate are bound to do well. A low-cost S&P 500 index fund will achieve this goal.

That’s the “what” of investing for the nonprofessional. The “when” is also important. The main danger is that the timid or beginning investor will enter the market at a time of extreme exuberance and then become disillusioned when paper losses occur. (Remember the late Barton Biggs’s observation: “A bull market is like sex. It feels best just before it ends.”) The antidote to that kind of mistiming is for an investor to accumulate shares over a long period and never sell when the news is bad and stocks are well off their highs. Following those rules, the “know-nothing” investor who both diversifies and keeps his costs minimal is virtually certain to get satisfactory results. Indeed, the unsophisticated investor who is realistic about his shortcomings is likely to obtain better long-term results than the knowledgeable professional who is blind to even a single weakness.

If “investors” frenetically bought and sold farmland to one another, neither the yields nor the prices of their crops would be increased. The only consequence of such behavior would be decreases in the overall earnings realized by the farm-owning population because of the substantial costs it would incur as it sought advice and switched properties.

Nevertheless, both individuals and institutions will constantly be urged to be active by those who profit from giving advice or effecting transactions. The resulting frictional costs can be huge and, for investors in aggregate, devoid of benefit. So ignore the chatter, keep your costs minimal, and invest in stocks as you would in a farm.

My money, I should add, is where my mouth is: What I advise here is essentially identical to certain instructions I’ve laid out in my will. One bequest provides that cash will be delivered to a trustee for my wife’s benefit. (I have to use cash for individual bequests, because all of my Berkshire Hathaway (BRKA) shares will be fully distributed to certain philanthropic organizations over the 10 years following the closing of my estate.) My advice to the trustee could not be more simple: Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund. (I suggest Vanguard’s. (VFINX)) I believe the trust’s long-term results from this policy will be superior to those attained by most investors – whether pension funds, institutions, or individuals – who employ high-fee managers.

And now back to Ben Graham. I learned most of the thoughts in this investment discussion from Ben’s book The Intelligent Investor, which I bought in 1949. My financial life changed with that purchase.

Before reading Ben’s book, I had wandered around the investing landscape, devouring everything written on the subject. Much of what I read fascinated me: I tried my hand at charting and at using market indicia to predict stock movements. I sat in brokerage offices watching the tape roll by, and I listened to commentators. All of this was fun, but I couldn’t shake the feeling that I wasn’t getting anywhere.

In contrast, Ben’s ideas were explained logically in elegant, easy-to-understand prose (without Greek letters or complicated formulas). For me, the key points were laid out in what later editions labeled Chapters 8 and 20. These points guide my investing decisions today.

A couple of interesting sidelights about the book: Later editions included a postscript describing an unnamed investment that was a bonanza for Ben. Ben made the purchase in 1948 when he was writing the first edition and – brace yourself – the mystery company was Geico. If Ben had not recognized the special qualities of Geico when it was still in its infancy, my future and Berkshire’s would have been far different.

The 1949 edition of the book also recommended a railroad stock that was then selling for $17 and earning about $10 per share. (One of the reasons I admired Ben was that he had the guts to use current examples, leaving himself open to sneers if he stumbled.) In part, that low valuation resulted from an accounting rule of the time that required the railroad to exclude from its reported earnings the substantial retained earnings of affiliates.

The recommended stock was Northern Pacific, and its most important affiliate was Chicago, Burlington & Quincy. These railroads are now important parts of BNSF (Burlington Northern Santa Fe), which is today fully owned by Berkshire. When I read the book, Northern Pacific had a market value of about $40 million. Now its successor (having added a great many properties, to be sure) earns that amount every four days.

I can’t remember what I paid for that first copy of The Intelligent Investor. Whatever the cost, it would underscore the truth of Ben’s adage: Price is what you pay; value is what you get. Of all the investments I ever made, buying Ben’s book was the best (except for my purchase of two marriage licenses).

Warren Buffett is the CEO of Berkshire Hathaway. This essay is an edited excerpt from his annual letter to shareholders.

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Divergence in consumer confidence may be a symptom of income inequality

Divergence in consumer confidence may be a symptom of income inequality

Courtesy of SoberLook.com
 
US consumer confidence indicators show visible improvements since the government shutdown dip back in October (see post) – although confidence measures have stalled this month.
 

On a longer time scale, confidence, while still significantly below historical averages, has improved tremendously since the Great Recession. There is however a troubling trend. The improvement in the top income bracket has been way ahead of the lower income survey participants. In fact the gap between households with incomes of $35-$50K per year and those with incomes that are above $50K is at record levels over the past few months.
 

Source: Wells Fargo

Given that confidence is often linked to income growth (including expectations of future income), this could be a further indication of wage stagnation for employees in the lower wage brackets (see discussion). In the long run this growing income inequality may end up creating headwinds for economic expansion in the US.

 

Clearing Billions in Profit Is About To Get Much Harder

Courtesy of Charles Hugh-Smith of OfTwoMinds blog,

The math of netting $1 billion is daunting.

The mainstream financial media nearly wet its collective pants with excitement in reporting that the planet's corporations paid $1 trillion in dividends in 2013. What they didn't report is that clearing billions in profit is about to get much harder.

As a refresher, let's look at what it takes to net $1 billion in net profit.

You sell 10 products or services that each yield $100 million in net profit. There aren't too many such products or services. Aircraft carriers come to mind, but there are fewer than 40 active-duty carriers in the world. A semiconductor fabrication plant that costs $1+ billion might yield $100 million in net profit for its vendors, but there aren't many $1+ billion fabs around.

You sell 100 products or services that each yield $10 million in net profit. Examples include large airliners, power plants, etc.

You sell 1,000 products or services that each yield $1 million in net profit.

You sell 10,000 products or services that each yield $100,000 in net profit.

You sell 100,000 products or services that each yield $10,000 in net profit.

You sell 1,000,000 products or services that each yield $1,000 in net profit.

You sell 10,000,000 products or services that each yield $100 in net profit.

You sell 100,000,000 products or services that each yield $10 in net profit.

You sell 1,000,000,000 products or services that each yield $1 in net profit.

Let's consider a well-known example of a highly profitable company: Apple. Back in the good old days, when Macintosh computers were scarce and highly desirable, Apple famously netted $1,000 per computer in profit. (Please adjust for inflation to dial in the time-frame.)

So Apple had to sell 1 million Macs to net $1 billion.

Margins have dropped considerably as competition increased and the cost of components dropped. Can any company net $1,000 nowadays on a personal computer? It seems unlikely, as technology works to lower costs and increase supply, reducing margins.

Let's say Apple nets $100 per iPhone and iPad. If so, Apple has to sell 10,000,000 of these devices to net $1 billion.

But since low-cost Android phones and tablets can be had in China for $50 each wholesale, manufacturers without the cache of the Apple brand and features have to sell 100,000,000 such low-cost phones and tablets at $10 net profit each to net $1 billion.

At the consumer-products level, companies selling shampoo, diapers, etc. have to sell 1 billion items that each net $1 to reap $1 billion in net profit.

As the costs of production and the demand both decline, profits plummet along with prices and sales. Apple looks ahead and sees a market for smart phones and tablets that is increasingly saturated in advanced economies (i.e. everyone who wanted one has already bought one, and the market for replacements is not a high-growth scenario) and increasingly competitive in emerging markets (i.e. consumers might desire an Apple product but are unable to afford one, so they buy a $50 device instead).

Thus it is not entirely surprising that Apple is looking far afield for new opportunities to reap high margins and profits: Apple exploring cars, medical devices to reignite growth (S.F. Chronicle, subscription required)
 

 

 

Such a buying spree has ignited fierce speculation in tech circles and on Wall Street about Apple's future ambitions, especially as smartphone and tablet sales start to slow. Most of that speculation has centered on wearable technology or perhaps a souped-up upgrade of Apple TV.But Apple is thinking bigger. Much bigger.

 

 

A source tells The Chronicle that Perica met with Tesla CEO Elon Musk in Cupertino last spring around the same time analysts suggested Apple acquire the electric car giant.

 

 

The newspaper has also learned that Apple is heavily exploring medical devices, specifically sensor technology that can help predict heart attacks. Led by Tomlinson Holman, a renowned audio engineer who invented THX and 10.2 surround sound, Apple is exploring ways to predict heart attacks by studying the sound blood makes at it flows through arteries.

 

 

Taken together, Apple's potential forays into automobiles and medical devices, two industries worlds away from consumer electronics, underscore the company's deep desire to move away from iPhones and iPads and take big risks.

Allow me to state the obvious: Apple is grasping at straws in its search for new ways to net $1 billion. Electric autos are a small but growing market, but Mr. Musk appears to be doing quite well on his own at Tesla and has little incentive to cut anyone else into the deal.

High-cost medical devices depend on the tottering sickcare system for payment, and if the Affordable Care Act (ACA) has indeed provided the final destabilizing push over the cliff, counting on the gummit to pay full price for millions of costly devices/tests may not be a sure bet any more.

The math of netting $1 billion is daunting. You have to sell a million products or services that net $1,000 each to clear $1 billion. Say the battery pack on an electric car costs $12,000 now. It's certainly possible to net $1,000 on each pack at that price. But you have to sell 1 million packs a year to net $1 billion. Since electric autos are selling in the thousands, not millions, it will be a long time before anyone can sell 1 million battery packs a year.

As the price of batteries declines, it will become more difficult to net $1,000 per pack. By the time the price has declined to the point that someone can sell 1 million packs a year, the net profit per pack might be $100 rather than $1,000.

Here's the macro picture: China and the emerging markets are slowing as various credit bubbles pop, meaning the profits from moving commodities to Asia will plummet. The developed world is also depending on credit bubbles and the one-time consumption of seed corn (capital/equity) for its anemic expansion. Eating Our Seed Corn: How Much of our "Growth" Is From One-Time Cashouts? (February 25, 2014)

The point is this: technology lowers margins, and credit bubbles inevitably pop. Any company or nation that depends on maintaining high margins in credit-bubble-based "growth" is about to find that it's much harder to net $1 billion, much less $1 trillion.

Morgan Stanley Underwrites TSLA Convertible Offering Day After 100% Stock Price Upgrade

Perplexed about Morgan Stanley's seemingly irrational exuberance over TSLA? Read This is nuts. When’s the crash? And this: 

Morgan Stanley Underwrites TSLA Convertible Offering Day After 100% Stock Price Upgrade

Courtesy of ZeroHedge

Tesla has just announced it intends to issue a $1.6 billion convertible note offering "for the development of a "Gigafactory" and a "Gen III" vehicle." While not that unusual – and of course, why not take advantage of low cost financing and a surging momentum in your stock – what we did find at least intriguing was the underwriters included Morgan Stanley. This is the same firm (though we would be very sure that Chinese walls ensured total lack of knowledge) that doubled their price target (from $153 to $320) for TSLA yesterday (following the analyst's now almost clairvoyant questions during the earnings conference call). Paging Henry Blodget?

Four things jump out at us…

1. During the recent conference call, MS analyst Adam Jonas seems to be advancing the idea of a capital raising for this battery factory on the behalf of Musk, who just agrees with the concept…

Adam Jonas: Elon, the stock price and the results have been obviously performing very well lately. You’ve got some great investment opportunities and some growth opportunities ahead of you, not only in the auto business but also in the non-auto business and the battery business. So I’m just wondering, how are you thinking about being opportunistic and pulling in some fresh capital to help derisk the plan, plan for a force majeure, or to see some of these opportunities that you have.

Elon Musk: Yes, I think that’s a good idea. I agree with that. I think that would be the smart move. We can talk more about that next week with — and also discuss the Gigafactory plans. Unfortunately, I can’t say anything [indiscernible] right now, except that I agree. I think your advice is good.

Adam Jonas: Okay. And I don’t want to follow up [ph] or anything, but as a follow-up to that, I guess, is a — would a capital raising be a prerequisite to launch the Gigafactory? Or is that an understatement?

Elon Musk: I think it’s necessary to have it occur in 3 years. It’s not necessary if we allow that time frame to expand.

2. Morgan Stanley raises their price target for TSLA by over 100%

January 25: Raising our price target to $320 from $153 previously.

We understand the change to our fair valuation of TSLA shares is significant – more than $13bn on a fully diluted share count of 142m.

This magnitude of value attribution is equivalent to an additional $1.7bn of after tax free cash flow by 2020, growing at 5% with a 12% discount rate. A $1.7bn NOPAT number is enormous within the scope of Tesla’s existing business path (our current forecasts call for $0.8bn of net income by 2015 and $2.1bn by 2020).

However, from the perspective of a global auto industry (>100 million annual unit sales and >$2 trillion of revenues by 2020) or a global electric utility industry (0.7 billion households combined in US + Europe + China out of households 1.4 billion globally) it is a tiny number. Our previous forecast of 500k complete TSLA vehicles by 2028 would account for 40bps of global market share.

Successful? Yes. Disruptive? Not really at all.

3. Day after Stock soars $60, Morgan Stanley underwrites a huge convertible note issue for TSLA (implicitly reducing an dilution via the stock ramp).

 

Tesla announced today an offering of $1.6 billion aggregate principal amount of convertible senior notes in an underwritten registered public offering. Of the total offering, Tesla will offer $800 million aggregate principal amount of convertible senior notes due 2019 and $800 million aggregate principal amount of convertible senior notes due 2021. In addition, Tesla intends to grant the underwriters a 30-day option to purchase up to an additional $120 million in aggregate principal amount of convertible senior notes due 2019 and an additional $120 million in aggregate principal amount of convertible senior notes due 2021, for a total potential offering size of up to $1.84 billion.

Goldman, Sachs & Co., Morgan Stanley, J.P. Morgan and Deutsche Bank Securities are acting as joint book-running managers for the offering.

and 4. In the disclosures, of course, Morgan Stanley admitted it would seek compensation from Tesla (which it did)…

In the next 3 months, Morgan Stanley expects to receive or intends to seek compensation for investment banking services from Autoliv, Avis Budget Group Inc, BorgWarner Inc., Dana Holding Corp., Delphi Automotive PLC, Ford Motor Company, General Motors Company, Goodyear Tire & Rubber Company, Hertz Global Holdings Inc, Johnson Controls, Inc., Lear Corporation, Magna International Inc., Tenneco Inc., Tesla Motors Inc., TRW Automotive Holdings Corp.

As long as CNBC (and everyone else in the status quo hugging mainstream media) keeps pumping every word from the sell-side as gospel, this will never end…

While we are sure this is a mere coincidence and that sell-side research which absolutely cannot pay its own way has learned its lessons, as one smart chap wrote us…

This is exactly the modus operandi of the dot-com analysts: roping retail investors in at higher and higher levels while the companies concerned massively diluted shareholders leading to an implosion… I cant remember a time apart from Dotcom where price targets were jacked up in this way right before a capital raising.

Mania and Panic Boost US Markets

Courtesy of Lee Adler of the Wall Street Examiner

This report has become a broken record. However, sooner or later the Fed will be forced to hit the brakes and the fallout from its insane policies of the past 10 years will start.

The Fed has printed plenty in February, but the effect has been muted because the Treasury is floating a massive amount of new debt. There’s been enough supply to absorb the Fed’s cash injections twice over. It’s seemingly a miracle that the markets have held up as well as they have. I’ll just reiterate that I believe that this attests to two factors. One is just a garden variety institutional mania, and the other is foreign capital flight into the US. Those two forces feed on each other.

Macroliquidity Component Indicators 
 
Fed Cash to Primary Dealers The Fed has now tapered QE twice, by $10 billion each, in addition to the silent taper of reduced MBS replacement purchases that has been under way for more than a year. Can you see all that tapering on this chart? You can’t? That’s what I thought. It’s virtually invisible. That’s how small it is. Once the February March Treasury supply bulge is cleared out, the markets should have clear sailing until May… then go away. 

 

For Lee’s full reports, click this link to try WSE’s Professional Edition risk free for 30 days!

Copyright © 2012 The Wall Street Examiner. All Rights Reserved. 

This is nuts. When’s the crash?

This is nuts. When’s the crash?

By  at FT Alphaville

Only 12 years to go till the “utopian society” drives up.

That arrives as part of Morgan Stanley’s latest on everybody’s favourite electric car company, Tesla.

Well, we say car company. It turns out cars are just the begining:

While acknowledging its ultimate potential, up to this point we have observed Tesla becoming more of an annoyance to the established order of automotive power rather than a true disruptor But what if Tesla’s ambitions extended further than giving high-end OEMs a run for their money? What if a period of transformational technological change in the auto industry coincided with Tesla’s application of its capabilities in hardware, software, infrastructure, and manufacturing.

What if, indeed. Words seem too puny for the scale of the possibilities here. We need boxes and numbers, really big numbers…

Keep reading This is nuts. When’s the crash? | FT Alphaville.

China Gold Imports Surge – Or Fall. You Decide

Courtesy of John Rubino.

Chinese gold imports are becoming a case study in the power of journalists to control the slant of a story by deciding which facts to highlight. The following chart contains the relevant data.

China gold imports Jan 2014

Here’s how the mainstream press, in this case Bloomberg, handled it:

China’s Gold Shipments From Hong Kong Decline as Demand Weakens

China’s gold imports from Hong Kong fell in January as jewelers and fabricators in the world’s largest consumer of the precious metal reduced purchases on expectation demand may weaken after Lunar New Year holidays.

Net imports totaled 83.6 metric tons last month, compared with 91.9 tons in December and 19.6 tons a year earlier, according to calculations by Bloomberg News based on data from the Hong Kong Census and Statistics Department today. Exports to Hong Kong from China declined to 19 tons in January from 34.8 tons in December, the Statistics Department said in a separate statement. Mainland China doesn’t publish such data.

And here’s how MineWeb’s Lawrence Williams handled the same story:

China’s January Hong Kong gold imports soar 326% year on year

Statistics are how you read them and China both imported 326% more gold from Hong Kong in January than it did a year earlier, or 9% less than in the previous month.

Lies, damn lies and statistics! Take the headline above and compare it with the Bloomberg headline for effectively the same story using exactly the same figures which was: China’s Gold Shipments From Hong Kong Decline as Demand Weakens. Both headlines are absolutely correct based on the figures but you wouldn’t believe so from reading them, indeed you could be forgiven for thinking one of them is obviously a downright lie. It just depends which way you care to spin it and some recent Bloomberg headlines do seem to have tended towards negativity with regard to Chinese gold imports.

Consider the facts. According to the Bloomberg interpretation of the latest gold import and export figures from the Hong Kong Census and Statistics Department, the special administrative region exported a net 83.6 tonnes of gold to the Chinese mainland in January. As Bloomberg rightly notes this is a fall – albeit a fairly small one – of around 9% from the 91.9 tonnes in December – so far so good. But gold trade between Hong Kong and Mainland China can be seasonal so perhaps the better comparison should be to compare this with the net exports from Hong Kong to mainland China in January last year – which came to a very low 19.6 tonnes – hence the 326% rise noted in theMineweb headline. Incidentally Hong Kong net gold exports to the mainland were 96.7 tonnes in December 2012 – so the December figures for 2012 and 2013 were broadly comparable, but the January ones certainly were not!

What can one surmise from that? Perhaps not a lot, although there are continual anecdotal stories in the press of huge demand in China by individuals for gold from shops which sell the precious metal in various forms. By any standard, 83.6 tonnes of gold is a lot of the yellow metal. To put it in perspective it’s 3.7 tonnes more than the world’s 37th largest holder of gold, Australia, holds in its total central bank reserves, and given that most over the counter gold purchases in China are in grammes rather than kilos or tonnes – and 83.6 tonnes equates to 83.6 million grammes, that suggests a huge number of Chinese are still stocking up on gold. So if this represents a weakening in demand, as the Bloomberg headline suggests, then the gold investors should still be happy with that interpretation despite its overall downbeat connotations.

What can be gleaned from the figures is that gold demand in the runup to the Chinese New Year remained strong. Historically December is a strong month for Chinese gold imports as traders stock up ahead of the Lunar New Year holiday, and it usually slips back in January, but this year was somewhat different with demand obviously remaining strong right through January. Rather than taking month on month figures perhaps one should look at December and January combined as a guide to real demand over the holiday, and this may well have been exceptional. Imports into the mainland through Hong Kong ahead of this New Year holiday thus totalled 175.5 tonnes, whereas that immediately ahead of last year’s New Year holiday was a mere 116.1 tonnes, suggesting that demand in this Year of the Horse was actually over 50% greater than a year ago! You can make of these statistics what you may, but to this observer it suggests that Chinese demand remains extremely strong.

Of course, as we have often noted here, it is believed that China imports gold through other ports of entry than Hong Kong too as the Shanghai Gold Exchange consumption figures remain consistently well in excess of the Hong Kong export stats. We should probably leave it to Koos Jansen and his very interesting In Gold we Trust website for further comment on what we believe to be the true figures for Chinese consumption.

Obviously, Williams gets it right. Chinese gold demand is highly cyclical, so comparing a relatively-weak month like January to a traditionally-strong one like December is like comparing pre-and-post-Christmas retail sales in the US; a big drop always occurs, so you can’t read anything into sequential numbers. Instead, retail analysts look at year-earlier sales for a sense of the trend – and the mainstream media usually reports the year-over-year comparisons accurately. So they clearly understand the concept.

Why the difference with gold? Well, it’s possible that the seasonality of that market isn’t well-understood. And it’s also possible that there’s an institutional bias in shops like Bloomberg, where gold is seen as a commodity at best and a “barbarous relic (Keynes) or “old-fashioned money” (Krugman) at worst. So perhaps Bloomberg reporters are operating under editorial guidelines that call for gold to be shown in the least favorable light.

Whatever the cause of the misreporting, the fact is that China continues to pull gold away from Western central banks in increasing quantities, bringing us ever-closer to the day when the supply runs out.

Visit John’s Dollar Collapse blog here >

The Housing Recovery Myth In New York And New Jersey Ends With A Bang As Foreclosures Surge

Courtesy of ZeroHedge. View original post here.

Submitted by Tyler Durden.

It was about a year ago when we noted a core component of the US housing non-recovery: the time to sell foreclosed homes had just hit a record of 400 days across the nation. We showed the following chart from RealtyTrac confirming just this:

 

We also proceeded to highlight some thoughts from a real housing expert, not a made for financial comedy TV "housing guru", in this case Marc Hanson, who pointed out the Bottom line on the Zombie housing market:

Of the 54 million homeowners with mortgages — the primary repeat buyer cohort and a primary builder demand cohort — over 22 million are dead to the housing market. Of the 70 million homeowners — mortgage'd and free and clear — 33 million are Zombies. Thus, we can't expect housing to act like it has in the past. With so many Zombies it will be impossible for repeat and new home sales to perform as expected. The past 18 month bounce — especially on prices — has been on cheap and easy money from investors looking for a dividend stock and/or Treasury replacement trade. some foreigners following their lead, and finally the 'dumb money' (retail) chasing into this summer.

But we are running out of greater fools very quickly, especially with first-timers sidelined and new-era "investors" who are quickly pricing themselves out of markets nationwide.

(More can be read in the original article).

Fast forward to today when even the last traces of the lie that sustained the housing recovery myth are being swept away, and we get the following article from Bloomberg titled "Foreclosures Surging in New York-New Jersey Market." The punchline is quite clear but below, for those who are new to this story, are the key supporting points:

The epicenter of the U.S. foreclosure crisis is shifting to New Jersey and New York, threatening a housing rebound in one of the country’s most densely populated areas.

New Jersey has surpassed Florida in having the highest share of residential mortgages that are seriously delinquent or in foreclosure, with New York third, a Mortgage Bankers Association report showed last week. By contrast, hard-hit areas such as Arizona and California have some of the lowest levels of soured loans after allowing banks to quickly foreclose after the 2007 property crash.

The number of New York and New Jersey homeowners losing their houses reached a three-year high in 2013. Banks in these states have been slowly working through a backlog of delinquent loans that enabled borrowers to skip mortgage payments for years. Now these properties are poised to empty onto a market where affluent Manhattan suburbs neighbor blighted towns that are struggling most with surging defaults.

The good news (according to some): thousands of people could live mortgage free for years until the bank delays obtaining the keys to the foreclosed property. This was money which instead of going to the mortgage owner, would instead go to buy Made in China trinkets and gizmos and otherwise keep the US retail party humming. Specifically, as we observed long ago in March of 2011, the benefit to the US economy from "deadbeat squatters" was about $50 billion per year. Which brings us to the bad news: the party – retail and otherwise – is ending, as courts and banks finally catch up with inventory levels on both sides of the foreclosure pipeline, and those who lived for years without spending a dollar for the roof above their head are suddenly forced to move out and allocated the major portion of their disposable income toward rent.

Lenders in New Jersey are pushing cases through more quickly and it now takes about two months to process final judgments against delinquent homeowners, compared with a backup of nine months a few years ago, said Kevin Wolfe, assistant director of the Civil Practice Division in the Administrative Office of the Courts.

The Office of Foreclosure, which reviews case files before they can move to the final step of sheriff sale, has added four permanent staff members, six law clerks and 10 case analysts since 2012. It previously had seven employees.

“We are staffed up to move these cases faster,” Wolfe said. “But the other reason cases are moving more quickly is that lenders have improved their foreclosure practices and worked out logistics with their law firms and, as a result, they’re geared up to handle foreclosures more efficiently.”

Which means that as the inventory bottleneck suddenly unclogs and thousands of new properties hit the market with an urgency to sell before anyone else does, things in New York and especially New Jersey are about to go from bad to worse.

“It is really a delayed reaction in New Jersey and New York,” said Michael Fratantoni, chief economist for the Mortgage Bankers Association in Washington. “Loans that were made pre-crisis have been in this state of suspended animation for a number of years. And now, we are beginning to see the pace of resolution pick up.”

In January, the number of New York foreclosure auctions reached 527, the highest monthly level since October 2010, according to data firm RealtyTrac. Foreclosure filings in New York City increased 30 percent to 15,993 in 2013, a three-year high, according to RealtyTrac.

Almost 10,000 cases in New Jersey headed to a sheriff sale in 2013, 47 percent more than the year before and the highest level since 2009, according to the New Jersey Administrative Office of the courts. Across the country, repossessions fell 31 percent in 2013 to the lowest since 2007, according to RealtyTrac.

The implication is that prices – already suffering in these two core states – are about to go far, far lower:

The real estate markets in New York and New Jersey are trailing the rest of the country as a result. Prices in New Jersey, the most densely populated state, climbed 2.9 percent in the fourth quarter from a year earlier, compared with a 7.7 percent jump for the U.S, the Federal Housing Finance Agency said yesterday. New York values rose 3.7 percent.

“Price increases that are occurring in the rest of the country are not likely to happen in the New York-New Jersey area, with the potential inventory that can come at any time,” said Lawrence Yun, chief economist of the National Association of Realtors.

“When one sees a price increase in Phoenix or many other parts of the country, one can assume it’s a genuine increase from falling inventory,” he said. “If it happens in Edison, New Jersey, or Long Island, New York, one has to ask, ’Is this for real or just temporary?”

Actually, Larry, when one sees price increase in Phoenix i) one will be wrong as prices in Phoenix just posted their first monthly decline since 2011, and ii) nobody can assume anything is genuine in a housing market in which mortgage origination just dropped to a 19 year low, meaning only those with abundant cash and no regard for cost can continue buying.

Everyone else is about to get a very harsh lesson in what it means to have been lied to by the propaganda machine for years, and suddenly have nothing to show for it but some vastly overpriced real estate.

Bitcoin Exchange Mt. Gox Goes Offline Amid Allegations of $350 Million Hack

Bitcoin Exchange Mt. Gox Goes Offline Amid Allegations of $350 Million Hack 

By ROBERT MCMILLAN

Mt. Gox, once the world’s largest bitcoin exchange, has gone offline, apparently after losing hundreds of millions of dollars due to a years-long hacking effort that went unnoticed by the company.

The hacking attack is detailed in a leaked “crisis strategy draft” plan, apparently created by Gox and published Monday by Ryan Selkis, a bitcoin entrepreneur and blogger (see below). According to the document, the exchange is insolvent after losing 744,408 bitcoins — worth about $350 million at Monday’s trading prices. The plan paints a bleak picture of the exchange’s finances and outlines an arbitrage scheme to restore the exchange to solvency. “The reality is that Mt. Gox can go bankrupt at any moment, and certainly deserves to as a company,” the document states.

WIRED couldn’t confirm the authenticity of the document. Reached Monday night, a Gox representative declined to comment on the document and referred us to the company’s webpage, before abruptly hanging up. But the website went offline a few hours after the company suspended trading on its exchange, and if the document is indeed authentic, the situation it described could reverberate across the world of bitcoin and possibly hamper the future of the digital currency.

Bitcoin insiders had been bracing for the worst from Mt. Gox for weeks, but the magnitude of the apparent theft — which would be the largest bitcoin heist ever — and the company’s alleged plan to replenish its stock of bitcoins took even seasoned bitcoiners by surprise. “Gox is the worst-run business in the history of the world,” said Roger Ver, in an instant message interview. Ver is a bitcoin advocate who lives across the street from Mt. Gox’s Tokyo offices and tried to help out the troubled exchange the last time it was hacked, back in 2011.

Keep reading Bitcoin Exchange Mt. Gox Goes Offline Amid Allegations of $350 Million Hack | Wired Enterprise | Wired.com.

Tesla’s Next Trillion-Dollar Industry

Tesla's Next Trillion-Dollar Industry

Courtesy of  at Business Insider
Elon Musk Tesla Portrait Illustration

[Picture credit: Mike Nudelman/Business Insider]

Morgan Stanley's Adam Jonas sees huge opportunities for growth in Tesla.

"Tesla’s quest to disrupt a trillion $ car industry offers an adjacent opportunity to disrupt a trillion $ electric utility industry," he wrote in a new note to clients. "If it can be a leader in commercializing battery packs, investors may never look at Tesla the same way again."

Jonas raised his target on Tesla to $320 from $153. The stock closed at $217 Monday, and it's up 6% in pre-market trading.

Jonas' thesis isn't too crazy.

One of the big hurdles in the green energy space is the inability to store energy cheaply. Tesla could come out front here, which would be a total game changer.

"Tesla says it will team up with partners to build the world’s largest Li-ion battery pack facility in the US," wrote Jonas. "We reflect the potential for lower battery costs through higher sales volume nearly doubling Tesla’s share of the global car market to 90bps by 2028, driving our target increase. If Tesla can become the world’s low-cost producer in energy storage, we see significant optionality for Tesla to disrupt adjacent industries."

"Very shortly, we will be ready to share more information about the Tesla Gigafactory," said Tesla CEO Elon Musk in the company's Q4 earnings announcement.

Here's Jonas' crude diagram of the Tesla future. It also includes the massive opportunity for self-driving cars.

tesla path

Morgan Stanley

 

Ukraine Hryvnia Down 17% in Two Weeks as Run on Banks Intensifies; 7% of Bank Deposits Withdrawn in 3 Days

Courtesy of Mish.

Ukraine’s currency, the Hryvnia, has fallen nearly every day for two weeks straight.

US$ vs. Hryvnia

On February 13 the Hryvnia went for 8.41 to the US dollar. Today it sells for 10.15 to the US dollar. That is a decline of 17.14% in two weeks.

Ukraine Seeks Help From IMF

Reuters reports Ukraine Asks IMF for Help on New Financial Aid Program

Ukraine has asked the International Monetary Fund to help prepare a new financial aid program, its central bank chairman said on Wednesday, adding that the new government would soon have its own anti-crisis program ready.

Stepan Kubiv [Ukraine’s new central bank head] told reporters the bank was taking measures to stop capital flight from Ukraine, which has spiraled since protesters took to the streets in November against President Viktor Yanukovich’s rejection of an EU trade deal.

7% of Bank Deposits Withdrawn in 3 Days

CNBC reports Risk of a Bank Run Heightens in Ukraine

Fears of a bank run in Ukraine are rising, as central bank reserves sink and some 7 percent of bank deposits were lost in just 3 days.


Yuriy Dyachyshyn AFP Getty Images

Ukraine’s reserves currently sit at $15 billion, according to the country’s newly appointed central bank governor, Stepan Kubiv. Kubiv said 7 percent of deposits, or 30 billion hryvnias ($3.3 billion), were lost between February 18-20, when the violence in the country reached its zenith and snipers opened fire on protesters.

Goldman Sachs has estimated the country’s foreign currency reserves have declined to $12 – $14 billion. …

Continue Here

French Joblessness Surges To New Record High (Up 30 Of Last 32 Months)

Courtesy of ZeroHedge. View original post here.

Submitted by Tyler Durden.

It would appear French President Francois Hollande's promise to bring jobs to the nation continues to fail dismally. Perhaps it was his recent trip to the US, but French Jobseekers rose more than expected for the 3rd month in a row to a new record high of 3.316 million.

Joblessness has now risen for 30 of the last 32 months. The last 5 months have seen jobseekers reaccelerate – surging by 2.5% (the most in 6 months). So, in a nutshell, things are getting worse, faster for the 2nd largest economy in Europe (and 5th largest in the world).

 

 

Charts: Bloomberg

The Best Way to Learn As an Investor

The Best Way to Learn As an Investor

The biggest risk you face as an investor isn't that you'll fail to be Warren Buffett; it's that you'll end up as Lehman Brothers. So why wouldn't you try to learn more from the latter? ~ Morgan Housel

By Morgan Housel at the Motley Fool 

I made my worst investment seven years ago.

The housing market was crumbling, and a smart value investor I idolized began purchasing shares in a small, battered specialty lender. I didn't know anything about the company, but I followed him anyway, buying shares myself. It became my largest holding — which was unfortunate when the company went bankrupt less than a year later.

Only later did I learn the full story. As part of his investment, the guru I followed also controlled a large portion of the company's debt and and preferred stock, purchased at special terms that effectively gave him control over its assets when it went out of business. The company's stock also made up one-fifth the weighting in his portfolio as it did in mine. I lost everything. He made a decent investment.

The silver lining is that I learned my lesson. I will never make this mistake again. Experiencing it made me a better investor.

But so many other investors made this mistake before I did. There is a graveyard of investors like me who got burned by blindly following legendary investors without knowing why those legends invested in the first place. Wouldn't it have been great if I learned from their errors, rather than experiencing the loss myself? I made this mistake in my early 20s. Every dollar I lost is a dollar that won't compound for the rest of my life. By the time I retire, this blunder may easily cost me $1 million.

Keep reading The Best Way to Learn As an Investor.

Bitcoins, Tulips, and the Madness of Crowds

Courtesy of Pam Martens.

Coming off the greatest financial collapse in modern history because of unregulated derivatives backed by dodgy collateral, it is more than a little disconcerting that we are now forced to use our digital ink to explain the pitfalls of investing in a digital currency backed by air.

There seems to be a mass hypnosis at work. For example, last evening, at 6:47 p.m., the wire service Reuters explained Bitcoin to its readers as follows:

“Unlike traditional currencies, where a central bank decides how much money to print based on goals like controlling inflation, no central authority governs the supply of bitcoins. Like other commodities and currencies, its value depends on people’s confidence in it.”

The last sentence of the Reuters statement was likely penned by someone who has never traded commodities or registered with the Commodity Futures Trading Commission. Bitcoin is decidedly not like other traded commodities. Corn, sugar, gasoline are tangible things. You can readily check that their trading value is hinged to reality by checking their price in the grocery store each day or, in the case of gasoline, at the pump. A Bitcoin, on the other hand, has no tangible commodity backing it. Its value is whatever some self-created website says it is.

According to news agency AFP, just before the MtGox Bitcoin website shuttered its operations yesterday, a Bitcoin was trading for $130. On other Bitcoin websites it was trading for around $500.

As for the sustainability of confidence in a product based on nothing tangible, one need only look at the trading range of Bitcoin at MtGox since January. It has declined from $900 to $130 according to AFP. If that were a real commodity, a crash of 86 percent in a few months would strongly suggest a catastrophic event.

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Risks of Abenomics “stalling out”

Risks of Abenomics "stalling out"

Courtesy of SoberLook.com
 
This coming Thursday Japan's Ministry of Public Management will be releasing the January CPI figures. The report will be closely watched to determine the progress of "Abenomics", as the nation tries to work its way out of the persistent long-term deflationary environment.
 

However, a number of analysts continue to be skeptical of Abenomics succeeding.

Derek Holt/Scotiabank – Here comes another round of Abe-hype, only this time, CPI inflation is expected to fall from the recent 1.6% y/y peak and that would further feed impressions that Abenomics is stalling out. The upturn in CPI inflation by December was still being heavily influenced by utility prices that were up 5.5% y/y due to the effects of yen depreciation on imported natural gas and oil prices, and higher electricity prices in the face of Japan’s continued shutdown of all of its nuclear reactors. Take energy and food — which is also probably under upward pressure in part due to yen depreciation — out of CPI and it is only up 0.7% y/y as food prices themselves are up 2.2%. Most of the CPI effects of the Bank of Japan’s efforts to depreciate the yen remain confined to a relative price shock to food and energy that crowds out spending power elsewhere in the economy on future second-round effects in the absence of a pickup in wage growth or credit access. 

 


In spite of high expectations, the boost to exports generated by weaker yen has been more than offset by the rising value of imports (see chart). With the sales tax hike looming and wages remaining stagnant, the risks of Abenomics "stalling out" remain high.

 

Mt. Gox CEO Will Have You Know He Has Not Run Away With Your Non-Virtual Money

Courtesy of ZeroHedge. View original post here.

Submitted by Tyler Durden.

Contrary to public speculation, Bitcoin CEO Mark Karpeles will have you know that after halting virtual transactions on his "Magic: The Gathering Online Exchange" for the second, and likely final time, that he has in fact not run away with any all too real money that may still be found at the now defunct exchange of virtual stuff.

From this guy:

 

Dear MtGox Customers,

As there is a lot of speculation regarding MtGox and its future, I would like to use this opportunity to reassure everyone that I am still in Japan, and working very hard with the support of different parties to find a solution to our recent issues.

Furthermore I would like to kindly ask that people refrain from asking questions to our staff: they have been instructed not to give any response or information. Please visit this page for further announcements and updates.

Sincerely,

Mark Karpeles

This is happening as the Japan police is finally stepping in:

Japanese authorities are looking into the abrupt closure of Mt. Gox, the top government spokesman said on Wednesday in Tokyo's first official reaction to the turmoil at what was the world's biggest exchange for bitcoin virtual currency.

"At this stage the relevant financial authorities, the police, the Finance Ministry and others are gathering information on the case," Chief Cabinet Secretary Yoshihide Suga told a regular news conference when asked about Tuesday's shutdown of the Tokyo-based exchange.

Speaking shortly after The Wall Street Journal reported that Mt. Gox had received a subpoena from federal prosecutors in New York, Suga declined further comment.

Japan's Financial Services Agency and Finance Ministry told Reuters on Tuesday that they do not have jurisdiction over Mt. Gox after the exchange's website went down and efforts to reach company officials failed. The Bank of Japan said it had nothing to add to a comment by Governor Haruhiko Kuroda that the central bank was "very interested" in bitcoin.

Interested because Kuroda too would love to apply to the Yen the same devaluation that Bitcoin trading on MtGox has experienced.

Geithner: “We Saved The Economy, Lost The Country”

Courtesy of Larry Doyle.

Given the steady stream of platitudes put forth by many past and present political and financial figures in and around Washington, I find myself typically dismissing much of what is said as simply “more of the same.” In the process, I usually scan headlines and quickly move on to review news or issues that I find more meaningful.

Yesterday I paused, though, upon seeing a headline in The Wall Street Journal that caused me to want to look a little deeper. The headline, Geither: ‘We Saved The Economy . . . We Lost The Country.’  This I had to read.    

Perhaps not surprisingly, former Treasury Secretary Geithner is writing a book to be released this coming May entitled Stress Test: Reflections on Financial Crises. I will definitely read this book given Geithner’s position within the inner circle during the most challenging financial and economic crisis since the Great Depression. In his promotional preview, he offers the following:

The financial crisis was a stress test of our nation, an extreme real-time challenge of a democracy’s ability to act when the world needed creative, decisive, politically unpalatable action. At times, the failures of our political system imposed tragic constraints on our ability to make the crisis less damaging and the recovery stronger. We made mistakes, it was messy, and the damage was devastating and long-lasting. And yet, at the moments of most extreme peril, the United States was able to design and execute a remarkably effective strategy.

I will grant him the only thing worse than bailing out our banks would have been not bailing out our banks.

The small group of key policy makers worked together surprisingly well, arguing, agonizing, sometimes agreeing to disagree, but mostly trying to get the right answer and minimize the time wasted on bureaucratic conflict. We saved the economy from a failing financial system, though we lost the country doing it.

I find this last statement in the paragraph absolutely fascinating, and I give Geithner real credit for issuing it. Perhaps he may want to use this line as a hook for selling his book, but it is worth serious review.

I completely agree with him that those involved in making public policy and pursuing appropriate judicial actions since the onset of what I believe is our ongoing economic crisis have, in fact, lost the country in doing so. Given that Americans are an overwhelming forgiving people, how is it that those in Washington and by extension on Wall Street lost the country?

In my opinion, America will forgive but always wants meaningful accountability that only comes from revealing the truth. Geithner writes that he hopes his “book will help answer some of the questions that still linger about the crisis. Why did it happen, and how did we let it happen?”

I asked myself the very same questions prior to writing my own book.

I think there are many reasons why the crisis happened, with the common denominator being excessive greed on the part of many folks along the food chain that ran from the point of mortgage origination through Washington to Wall Street and back and forth in repeated fashion.

In regard to how did it happen, I eagerly await reading Geithner’s work to see if he will provide cover for those at the intersection of Wall Street and Washington charged with protecting the public interest.

There are few individuals in the world more well-positioned than Tim Geithner to expose the incestuous, if not corruptible, dynamic that defines the Wall Street-Washington relationship. I am not expecting Geithner would dare cross the likes of Robert Rubin, Hank Paulson, Stephen Friedman and so many more political and financial elites who have come to define the element that our nation now truly detests and identifies as the cabal that took our nation down and never paid a price for it.

We shall see.

Check out my new book: In Bed with Wall Street: The Conspiracy Crippling Our Global Economy

Saxo Bank’s Steen Jakobsen Warns of Global Economic Vacuum, China Slowdown, Germany Growth Negative, 30% S&P Correction

Courtesy of Mish.

Steen Jakobsen, chief economist at Saxo Bank in Denmark, sent an interesting email yesterday regarding China, Germany, the European debt crisis, and equity prices.

Steen is one of the speakers at Wine Country Conference II, May 1-2 in Sonoma, California.

What follows is from Steen, I dispense with my usual blockquote style for ease in reading.

Economic Vacuum

China’s flag is waving strongly these days, the direction of the economic- and political winds have changed but the present multitude of macro changes is yet to be recognized by consensus and the market.

My conclusion is this:

  • China will slow-down to 5% growth over next two-three years.
  • China will start devaluing their currency in response to Abenomics and weaker terms of trade
  • China will no longer be the world’s biggest investor and importer of investment goods.

The changes will during 2014 mean that:

  • Germany growth will go negative quarter-over-quarter in Q4 (from Q3)
  • World growth will come down from the recent 3.7% to less than 3.0%
  • The recovery will once again be postponed and the synchronic monetary policy of the major central banks will be questioned, leading to all time new lows in interest rates
  • Deflation will take hold in Europe and become a major risk in the US
  • This final third crisis in this cycle will mean equity needs to be sold off. This comes after commodities sold off in the US banking- and housing crisis, followed by fixed income during the late stage European debt crisis now I see a 30% correction in H2 of 2014 after a high is registered between 1840/1890 in the SPX.

I simply believe that China leads the world. They took the burden of world growth in their hands during the peak of the crisis in 2008/09 through the biggest fiscal expansion ever seen (550 billion US Dollars), then they increased their investment to GDP ratios securing export orders for major European and US exporters until late 2013, but since the Third Plenary Session of the 18th CPC Central Committee in November 2013 the main objectives for the political elite in China have changed from growth and export to rebalancing, fighting graft, reducing pollution and betting a small crisis now is better than a big one later.

I have already spent considerable amount of ink explaining why China is proactively seeking a small crisis rather than a big one and how China can no longer afford to keep its investment to GDP levels excessive but now China seems to have engaged in a fundamental change to its FX rates – attempting to weaken the CNY [Yuan].

China is a long term critic of Abenomics and the ensuing devaluations as Japan and Korea remains its key competitors in the export market, but until last week China held their FX tight and tightening but now things have changed:

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US household debt – first increase in 4 years

US household debt – first increase in 4 years

Courtesy of SoberLook.com

For the first time in 4 years the overall debt of US households rose on a year-over-year basis. Consumer deleveraging seems to be finally slowing.
 

Source: Credit Suisse

While this overall increase could be interpreted as a sign of improved credit conditions and stronger consumer confidence, a more detailed look tells us there is more to this story. Below is the full breakdown of household debt outstanding over time.
 

Source: NY Fed

Here are some observations:

  • Mortgage balances were basically flat on a year-over-year basis, though the steady multi-year declines have been halted.
  • Credit card balances remain fairly flat as well.
  • Auto loans showed improvement, particularly with longer dated and sub-prime loan volume picking up (see post).
  • Student loans on the other hand increased by a whopping $114 billion for the year.

CS economists summarized the situation quite well:

Credit Suisse: – This development can be interpreted as 1) an indication that household risk tolerance is on the rise and income confidence has improved and 2) a sign that bank lending conditions are loosening up. 

Both conclusions, while legitimate, are tempered by the fact that most of the increased debt taken on by households over the past year has been in the form of generous student loans provided by the federal government –not generous consumer loans provided by commercial banks. 

And the pickup in net mortgage debt outstanding in recent months is due to reduced foreclosures and bank loan write-offs, as opposed to increased new mortgage production.

The deadly genius of drug cartels – TED talk

The deadly genius of drug cartels – TED talk

Fascinating TED Talk by Yale professor Rodrigo Canales who argues that we are complicit in up to 100,000 people dying in drug-related violence in Mexico in last 6 years. The harm goes beyond the countable deaths to incalculable pain and destruction. 

Excerpt from the transcript

The U.N. estimates that there are 55 million users of illegal drugs in the United States. Using very, very conservative assumptions, this yields a yearly drug market on the retail side of anywhere between 30 and 150 billion dollars. If we assume that the narcos only have access to the wholesale part, which we know is false, that still leaves you with yearly revenues of anywhere between 15 billion and 60 billion dollars. To put these numbers in perspective, Microsoft has yearly revenues of 60 billion dollars. And it so happens that this is a product that, because of its nature, a business model to address this market requires you to guarantee to your producers that their product will be reliably placed in the markets where it is consumed. And the only way to do this, because it's illegal, is to have absolute control of the geographic corridors that are used to transport drugs. Hence the violence. If you look at a map of cartel influence and violence, you will see that it almost perfectly aligns with the most efficient routes of transportation from the south to the north. The only thing that the cartels are doing is that they're trying to protect their business.

It's not only a multi-billion dollar market, but it's also a complex one. For example, the coca plant is a fragile plant that can only grow in certain latitudes, and so it means that a business model to address this market requires you to have decentralized, international production, that by the way needs to have good quality control, because people need a good high that is not going to kill them and that is going to be delivered to them when they need it. And so that means they need to secure production and quality control in the south, and you need to ensure that you have efficient and effective distribution channels in the markets where these drugs are consumed. I urge you, but only a little bit, because I don't want to get you in trouble, to just ask around and see how difficult it would be to get whatever drug you want, wherever you want it, whenever you want it, anywhere in the U.S., and some of you may be surprised to know that there are many dealers that offer a service where if you send them a text message, they guarantee delivery of the drug in 30 minutes or less.

Think about this for a second. Think about the complexity of the distribution network that I just described. It's very difficult to reconcile this with the image of faceless, ignorant goons that are just shooting each other, very difficult to reconcile.