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What We Read Today 09 May 2014

Econintersect: Every day our editors collect the most interesting things they find from around the internet and present a summary "reading list" which will include very brief summaries of why each item has gotten our attention. Suggestions from readers for "reading list" items are gratefully reviewed, although sometimes space limits the number included.

  • Apple in talks for $3.2bn Beats deal (Matthew Garrahan and Tim Bradshaw, Financial Times) In what would be Apple's largest acquisition ever, the Financial Times has an exclusive on the reported purchase of Beat Electronics, a headphone maker and streaming music operator. If the deal is finalized it will make former American Idol mentor Jimmy Iovine and hip-hop star Dr. Dre very rich, as well as return approximately a 300% return to the Carlyle Group which acquired nearly 50% equity in Beat just eight months ago for $500 million.

  • White House reviews crude oil export ban (Gregory Meyer and Ed Crooks, Financial Times) Special presidential advisor John Podesta has revealed that the White House is evaluating the possibility of allowing exports of crude oil from the U.S., a practice that has been banned since legislation was passed in 1975. That legislation give the president the authority to loosen the ban by executive order. The problem has arisen because the surge in shale oil production has created a glut of oil in the U.S. which cannot be reduced by refining because the new oil is low-sulphur and many American refineries are set-up for high-sulphur oil which comes from Latin America and Saudi Arabia, among other places.

Consider buying stocks in the energy and materials industries as they are seen as "late-cycle" sectors. They are "favored by investors as an economic cycle matures and inflationary pressures begin to build," writes Steven Pytlar, chief equity strategist at Prime Executions in a recent note. "These sectors are also seen as inflation hedges."

That means look at Energy Select Sector SPDR (ticker: XLE) and iShares U.S. Basic Materials (IYM) exchange-traded funds, which track stocks in their sectors, as well as the usual standby gold.

  • India’s Bourgeois Revolution (Shashi Tharoor, Project Syndicate) The nature of politics in India is changing from being only the purview of professional politicians to having more citizens running for office including well educated young professionals. That seems to be raising the quality of the political professional as well with "a new generation of educated articulate, and forward thinking politicians raising the standard of Indian politics".
  • The Changing Nature of Middle Class Work (Charles Hugh Smith, Of Two Minds) This article is the third in a series about the decline of the middle class. In this article Charles discusses the changing structure of the economy and how it is revolutionizing the nature of work itself. The article is a summary of the following discussion between Charles and Gordon T. Long.

Today there are 14 articles discussed 'behind the wall'.

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  • What's fueling consumer credit growth in the US? ( Walter Kurtz, Sober Look) For the first time in months there is something else increasing the rate of growth in consumer credit markets besides student loans. It is not revolving credit (primarily credit cards) which has had year-over-year growth hovering around 1% for 2 1/2 years. The major source of growth is auto loans and leases with strong demand for ABS (asset backed securities). Securitization is an increasing portion of auto lending financing. Econintersect wonders if the ABS buyers are aware that the traditional source of underwriting (the loan writer/issuer) can be suspect since the lender is now compensated for both issuing the loan and for selling it to the securitization package with no direct interest in having the loan be repaid. Such an arrangement has never led to problems before, has it? Oh, wait a minute ... :-(

consumer-credit-sober-2014-may-08-annotated

  • Crony Capitalism and the Oracle of Omaha (Vitaliy Katsenelson, Inefficient Markets, Institutional Investor) This is a great analysis of the conflict of interest for those serving on corporate boards for compensation of the hundreds of thousands for attending six meetings a year. His (Katsenelson) dissection of how Warren Buffett has (and has not) responded to criticism of his inaction on a Coca Cola compensation plan which he (Buffett) said was excessive is a clear condemnation of one of the few occasions when the Oracle of Omaha has stumbled over an ethics issue. See also Warren Buffet, Coca-Cola and the Not-So-American Dream.
  • Why America’s Big Banks Don’t Scare Me… Yet (Shah Gilani, Wall Street Insights & Indictments) Shah Gilani contributes to GEI. (With sarcastic tone) Shah says everything is great with the accounting and stability of our "too big to fail" banks.

I'm feeling the warm west wind, otherwise known as that constant flow of blathering Bullshirt from the Fed and bank CEOs that everything is irie, mon, and I'm lovin' it.

Like I said, I'm going to sleep well again tonight. Not because I'm short and shorting more bubblicious stuff every day, but because there ain't no reason to stress a few missed billions in losses or botched stress tests.

  • Fantasy Healthcare Scenario, Reader Anecdotes, Wildcards; Capital IQ Healthcare Report Link (Michael Shedlock, MISH'S Global Economic Trend Analysis) Mish discusses a report from S&P Capital IQ (McGraw-Hill Financial) that assesses the likelihood that corporations will be quickly dropping employee health plans and providing (limited) dollars for the purchase of health insurance through HIX (health insurance exchanges) a la Obamacare. This will be a way to contain the escalating costs projected if corporate sponsored plans are continued. See graph below. There is a fantasy healthcare scenario for liberals that ACA (Affordable Care Act) will lead to a single payer system for all like Medicare. Mish counters with a fantasy scenario of his own where ACA leads to everyone being responsible for buying their own health insurance on an exchange (or elsewhere). His fantasy has free market forces controlling health care costs. Here 's the link to the study Mish discusses.

corporate-health-care-costs

  • Psychiatry's scientific reboot gets under way (Clare Wilson, New Scientist) The U.S. National Institute for Mental Health is trying to bring psychiatric medicine out of the dark ages. The research is "now taking off". A useful comparison is provided by the author to describe the starting point:

Imagine you are a doctor before the advent of modern medical tests and your patient is gasping for breath. Is it asthma, a chest injury, or are they having a heart-attack? You don't know and have no idea how best to help them.

Some would argue that's what it's like for doctors trying to diagnose mental health problems today. There are no blood tests or brain scans for mental illnesses so diagnoses are subjective and unreliable.

  • Cable forces more channels down unwilling viewers’ throats (Cecelia Kang, The Washington Post) The cable industry is up against a wall of consumers who do not want what the cable companies are trying to force feed. Over the most recent six years bundled cable subscriptions have expanded from an average of 129 channels per household to 189, an increase of almost 50%. Yet the average number of channels viewed per household has not changed from 17.5 +/- 0.3 during that time. It is little wonder that the numbers of cable subscriptions are shrinking while streaming providers are growing rapidly. Read the Nieslen Newswire Report.

channels-tv-nielsen

  • Huawei Unveils New Phone to Compete With Apple and Samsung (Mark Scott, The New York Times) Already the world's third largest smartphone maker in the world, Huawei is now planning to enter the retail market to compete directly with Apple and Samsung. The Huawei phones operate using the Google Android system.
  • The Shocking Alzheimer’s Revelation that Could Impact 600,000 Americans (AgingCare.com, Care2) There is a newly discovered form of Alzheimer's Disease that doesn't affect memory or learning but still degrades other brain functions associated with motor activities and erratic behavior. Many of the afflicted (with so-called "hippocampal-sparing Alzheimer's" are misdiagnosed and are therefore not treated with therapies that can slow progression of the disease.
  • TSLA – Tesla Motors (Last:178.00) (Rick Ackerman, Rick's Picks) Rick Ackerman has contributed to GEI. This is a great case study of how excessive time value premiums can destroy classical option strategies even when the stock makes a big move - even in the direction presumably favored by the options selected.

Click on chart for larger image at Rick's Picks.
tesla-ricks-picks-2014-may-08-600x300

  • The Volcano That Rewrote History (William O'Connor, The Daily Beast) Good article about what this managing editor learned about as a child in a one-room Vermont school house as the year of "1800 and froze to death". In the summer there was snow on the ground at higher elevations all twelve months of the year in Vermont in 1816 (although probably not continuous coverage). Many farmers in northern New England could not gather enough fodder to winter livestock and many animals did not survive. O'Connor describes what happened all around the globe in 1816 and the years that followed as much of the northern hemisphere experienced much lower temperature the first couple of years after Mount Tambora erupted in what is now Indonesia. In the later years after the eruption there were several years with abnormally high temperatures starting in 1817. The occasion of this article is a review of the book Tambora: The Eruption That Changed the World by Gillian D'Arcy Wood.
  • Where do profits come from? (Matthew Yglesias, Vox) This is a discussion of one of the most troubling questions in economics. It is troubling because economic theory often fumbles the question rather than answering it. Marx was perhaps one of the first to center his thinking on the question and ended up getting it mostly wrong and much of the profession has gone downhill from there. The following two excerpts should be sufficient to get you to read this one.
To the mainstream, in other words, this is just one of many cases in economics where a stripped-down model is sometimes useful even if not literally true.

But there are some things mainstream economics doesn't seem to explain very well.

For example, on the neoclassical theory poor countries that successfully get rich should do so by liberalizing their financial systems, running trade deficits, and importing foreign money until over time they build up enough capital for the marginal productivity of labor to increase. In practice, successful catchup stories (first in Japan, then in Singapore and Taiwan and Korea, now in China) work the other way around - countries use financial repression and run trade surpluses to develop increasingly sophisticated local businesses.

  • The Largest U.S. Companies in 2004: Where Are They Now? (Shauna O'Brien, Dividend.com) Eight of the ten largest U.S. companies in 2004 are paying a higher dividend yield ten years later. The two that are not, Citigroup and AIG, are also the biggest losers in share price over the ten years. See first graph below. Of the ten largest market caps today, two (GE and Wal-Mart) have actually shrunk in total value over the last ten years. See second graph below.

market-cap-largest-us-dividend.com-2004

market-cap-largest-us-dividend.com-2014


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