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What We Read Today 06 August 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 (and sometimes longer ones) 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.

  • 21st Century Fox withdraws bid for Time Warner (Roger Yu, USA Today) The offer made by Rupert Murdoch of Fox the buy media giant Time Warner for $80 billion has been withdrawn. In late July the offer was made and immediately rejected by Time Warner. After the announcement was made Time Warner stock (NYSE:TMW) fell by 11% and Fox stock (NYSE:FOX) advanced 8%, both in after-hours trading.

  • Russia troops build up on Ukraine border (Sam Jones and Roman Olearchyk, Financial Times) As Ukrainian troops advance on Russian-backed separatists in eastern Ukraine, Russia has increased troops massed on its border with Ukraine from 15,000 last week to 20,000. This is still only half the number in April but a 1/3 rise in less than a week has western powers concerned. In recent weeks Ukraine has retaken much territory from the insurgents who have retreated into the major cities of eastern Ukraine.
  • Russian Media Goes Far Out to Explain Malaysia Airlines Disaster (Carol Matlack, Bloomberg Businessweek) This article was published by official Russian news services days after Malaysia Airlines MH17 was shot down. One of several possibilities put forth was that a Ukrainian jet had shot down the airliner. The remaining suggestions of cause were quite far-fetched.
  • Claim: MH17 Was Being Flanked By Ukrainian Fighter Jets (Steve Watson, Infowars) This article, also just days after the downing of MH17, says that all civilian and military flights over Ukraine were escorted by Ukrainian air force fighter jets. This also contains reports that Ukraine troops were responsible for the shoot-down.

Another German aviation source, a Colonel A.D. Bernd Biederman has also supported the "no missile" thesis, neues deutschland: NVA-Raketenspezialist: MH17 nicht von Boden-Luft-Rakete abgeschossen (Neues Deutchland). Biederman maintains that a missile shot would have started fires immediately and he claims that wreckage only started burning after impact with the ground. Econintersect: Would wreckage been spread over a a six to nine mile range if the plane was brought down intact? Would bodies have fallen from the sky separately from the plane? Could the plane have disintegrated at altitude and not have caught on fire? Could "bullets" cause the plane to disintegrate? See contemporaneous Daily Mail article.

One of the commenters on the Ward article states that the maximum altitude of the SU-25 Ukrainian aircraft implicated by other reports has a maximum unloaded altitude of 23,000 feet and fully loaded with munitions 16,000. Flight MH 17 was flying somewhere between 31,000 and 35,000 feet at last ground contact.

There are 10 articles discussed today 'behind the wall'.

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Why Coal Isn’t Going Away (Marin Katusa, Casey Research) Hat tip to John O'Donnell. While other large scale users of coal are only modestly increasing, holding steady or modestly decreasing use of coal, China is projected to triple coal consumption over the next 25 years - and China already is consuming nearly 40% of coal burned on the planet.


  • US watchdogs reject banks’ ‘living wills’ (Gina Chin and Tom Braithwaite, Financial Times) So-called 'living wills' were a key part of the Frank-Dodd Act for reforming the financial system. They are a requirement for banks to draw up plans that would dictate how they would dissolve their operations in an orderly way if they were no longer solvent. The document would define the processes for unwinding operations and financial contracts in a manner that avoided panic.

The Federal Reserve and the FDIC (Federal Deposit Insurance Corporation) said yesterday that the initial efforts of eleven large banks were not adequate. Goldman Sachs, JP Morgan Chase and Barclays Bank were singled out specifically for the most severe criticism, instructions saying that they must "improve or face draconian sanctions".

The Fed and the FDIC used different wording in their reports. The FDIC threw down a gauntlet , saying the plans were "not credible". This could open the possibility of punitive action, including divestitures and break-ups. The Fed, on the other hand, used softer language saying the banks must "take immediate action" to put right the "shortcomings" or it would join the FDIC in prescribing penalties.

In addition to the three banks especially singled out (above), the other eight banks included in this review were: Bank of America, Bank of New York Mellon, Citigroup, Credit Suisse, Deutsche Bank, Morgan Stanley, State Street and UBS.

  • China Default Storm Seen as Record Private Bonds Mature (Judy Chen, Bloomberg) Privately issued high-yield bonds (aka "junk" bonds) for more than $1 billion come due next quarter and there are concerns that the record level of debt in a slowing economy could produce a significant number of defaults. Debt has been growing rapidly; publicly traded non-financial companies with debt to equity ratios greater than 200% have increased by 2/3 in the past seven years. For the extreme growth of privately held debt in China see China Commercial Credit: A Financial "Starship Enterprise" (John O'Donnell, GEI News)
  • Frack Attack! (Dave Gonigam, 5 Min. Forecast) The failure of new companies one year after founding has increased for every sector over the 2o years 1991 to 2011, with some sectors doubling the failure rate. Business is becoming more and more concentrated in a small number of large companies. In 1992 60% of private sector workers worked for "mature companies". Today it's nearly 75%. With most job growth coming from new, small companies, is it any wonder that employment has struggled for five years to return near the level that existed before the Great Recession? See also next article.


  • Declining Business Dynamism in the United States: A Look at States and Metros (Ian Hathaway and Robert E. Litan, Brookings Institution) For the past 30 years the rate of business failures in the U.S. has varied between about 8% and 10% a year. Not even the Great Recession could force the failure rate above 10%, although 2009 was the first year since 1981 that the failure rate was not less than 10%. However, since 1978 the rate of new business formation has dropped from over 14% a year to about 8% 2009-2011. The Great recession impact can be seen in this data, though. The rate of new business formation declined from nearly 11% in 2006 to less than 8% in 2010, the steepest four year decline in the data series. Since 2008 the failure rate for businesses has exceeded the formation rate. Consolidation of business activity now appears to be entrenched and diversity is declining. If you feel that the free market has been becoming less free, here is some data to support that.


The consolidation of business has had an impact on workers as well. Inspite of the feeling of many that job security has been declining the rate of job relocation has declined by more than 25% since 1978 (from more than 36% a year to less than 26%).


The industry sectors with the biggest declines in new business formation between 1978and 2011 are construction (down 80%) and manufacturing (down 60%). The smallest decline came in retail (down 32%).

  • How genuine is China’s commitment to green energy? (Karolina Wysoczanska, China Spectator) China's commitment extends only to its internal interests, which are considerable considering the severe pollution problems with which they are faced. Any benefit to the rest of the world will be coincidental. See also the latest on China's current campaign to cut back on coal burning: Coal ban set to expand beyond Beijing (John Conroy, China Spectator)
  • China’s digital transformation (Jonathan Woetzel, Gordon Orr, Alan Lau, Yougang Chen, Michael Chui, Elsie Chang, Jeongmin Seong, and Autumn Qiu, McKinsey Global Institute) With 600 million internet users, China is the worlds most wired nation. The authors estimate that up to 22% of GDP growth for China over the next decade will come from the internet: productivity, new products and services and e-commerce.
  • Stock Hype On a Wing and a Prayer (Wolf Richter, Wolf Street) Natural gas production in th U.S. keeps increasing but does that mean that the energy resource represent an investment opportunity? It turns out that the opportunity is not that attractive. If current production and consumption figures for the U.S. are extrapolated the U.S. would be producing a surplus of natural gas and stop importing. But extrapolating from current numbers does not give a correct picture. (See next article.) So when you see a graph like the one below don't assume the dotted line extrapolation will ever be realized.


  • Where Money Goes to Die: How Fracking Blows Up Balance Sheets of Oil and Gas Companies (Wolf Richter, Wolf Street) The oil rush (via fracking) is being financed rather than supported from current revenues. If fracked wells had a long production life that wouldn't be bad. But the average fracked well loses more than half of production in the first year (some reports say the average is as high as 78%) and production declines to 10% of first year output after a few years. So financing production with negative cash flow looks like a fool's mission - especially if interest rates ever do go up.


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