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What We Read Today 13 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.

  • Ukraine may block Russian humanitarian aid convoy (BBC News) Ukraine says a Russian aid convoy of 300 trucks will not be allowed to cross the border between the two countries. Ukraine says the aid must be transferred from Russian vehicles to Ukrainian trucks under the supervision of the Red Cross. Putin announced the convoy Monday and said it was "in co-operation with the International Committee of the Red Cross". On Tuesday the Red Cross said "it still needs more security guarantees and information about the aid convoy".

  • Ex-MIT Professor, Son to Plead Guilty in Hedge Fund Scam (Christie Smith, Bloomberg) An MIT professor who was also Associate Dean of the Sloan School of Business and his MIT graduate, Harvard Business School MBA son are pleading guilty to running an investment fraud. The solicited more than half a billion dollars for investment using a trading model based on the father's research. They instead invested the money with a variety of other managers. One of them happened to be Bernie Madoff and investigation of his Ponzi scheme uncovered the malfeasance of the professor and his son.
"With our test, it is now possible to know with 95% accuracy if coffee is pure or has been tampered with," says Suzana Lucy Nixdorf, who led the research and is presenting the findings this week at a meeting of the American Chemical Society. If the test is adopted by the industry, expect fewer potato-flour espressos-unless you're into that sort of thing.
  • Colgate Total Ingredient Linked to Hormones, Cancer Spotlights FDA Process (Tiffany Kary, Bloomberg) The chemical triclosan has been linked to cancer-cell growth and disrupted development in animals. Regulators are reviewing whether it's safe to put in soap, cutting boards and toys. Consumer companies are phasing it out. Minnesota voted in May to ban it in many products. But Colgate-Palmolive Co.'s Total uses the compound to head off bacterial sources of gum disease. It appears than the approval process for triclosan in Total was aided by the FDA mysteriously withholding 35 pages of toxicology results from the final review process.


There are 11 articles discussed today 'behind the wall'.

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  • Junk Bond Funds Just Experienced A 6-Sigma Event (Sam Ro, Business Insider) Last week high yield (junk) bond mutual funds experienced an outflow of $7.1 billion. That was 4% of total assets and was an amount six standard deviations away from the mean (+0.15%). This appears to be a real Black Swan event, a "flomageddon" in the words of Charles Himmelberg of Goldman Sachs. The odds of a six sigma event are approximately 1 in 500 million. But, before you go overboard, consider that the standard deviation determination is based on the assumption that the data fits a normal (gaussian) distribution. It doesn't. The data distribution here is prone to "fat tails", especially on the downside. The approximate positions of the various multiples of standard deviation have been added to Sam Ro's graph. About 1.6% of the data points lie below -3 sigma, but for a normal (bell curve) gaussian distribution there would only be 0.15%. So this tail is not only fat, it is obese, with more than 10x the population expected for the calculations applied. This is another demonstration of the misapplication of statistics to market data which so often does not fit a bell curve well. Not only is this sloppiness intellectually shameful it has also made paupers of some practitioners. Well, maybe that's overstated; not necessarily paupers but certainly a lot less well off than they might have been not putting their trust in bogus models. Note: We may post an article that expands on this analysis. Any readers with comments or requests for things to be included, please send email or leave comment on this article.

hy-outflow-sam-ro-2014-aug-12-600x480-annotation-2

  • First-Time Buyers Shut Out of Expanding U.S. Home Supply (Prashant Gopal, Bloomberg) Housing inventory is shrinking at the bottom of the market and expanding at the top. Price increases (year-over-year) are largest in the bottom third of the market (15%), 12% in the middle and 9% in the top third. First-time home buyers almost exclusively buy in the lower end of the market and are very price sensitive because they are generally strapped for the down payment. Why is inventory tighter at the low end of the market? Blame the housing bubble: there are far more underwater homes in the lower price cohort. Owners in the low end are also less likely to be able to swing a sale where they (the seller) have to bring cash to the closing to pay off the mortgage. And, of course, new construction in the low end is quite rare; labor and materials are still too expensive to build very inexpensive houses.
  • German government 2-year dropped below zero today (Walter Kurtz, The Daily Slot email, no url)
The yield decline was at least in part driven by the ZEW economic sentiment indicator, which is continuing to decline far quicker than anyone anticipated. The Russia situation is part of the reason, while falling demand from the rest of the Eurozone for German goods is the rest of it.

germany-2-year-2014-aug-12

  • Expectation for Fed rate hike increasing (Walter Kurtz, The Daily Slot email, no url. The expectation for 78% of investors is that the Fed will raise short-term rates in the coming months and more than half of all U.S. investors think the first hike will come by 2Q 2015.

rate-Fed-hike-expectation-2014-aug-12

jobs-change-2008-2014

  • White House launches U.S. Digital Service, with HealthCare.gov fixer at the helm (Nancy Scola, The Washington Post) The firm that rescued HealthCare.gov from the graveyard of dead software last fall has been hired to establish a digital network to coordinate government services and functions. The White House calls it the USDS, the U.S. Digital Service and the objective is to create an efficient way for business and the public in general to interact with the government.
Using an elaborate network of sensors, microprocessors, and a camera, the AR-1 is able to deliver a Heads Up Display, with turn-by-turn GPS navigation, with information appearing approximately ten feet in front of the rider. They call it the Synapse platform, and it offers automatic infinitely variable focal distance, meaning that the GPS itself is clear no matter where the rider is looking. The whole point, of course, is to ensure that the driver is paying attention to all of the other vehicles on the street as opposed to averting attention to street signs, etc. With that in mind, the team also developed a rear-viewing system that gives a 180-degree view of what's behind the rider.
  • $CLV14 October Crude (Last:96.36) (Rick Ackerman, Rick's Picks) Rick Ackerman has contributed to GEI. $CLV14 is the October 14 futures contract for WTI crude on the New York Mercantile exchange. Below is his chart with some support levels added by Econintersect. (See also GEI Investing today: Investor Cycle Sell-Off In Crude.) Rick has some distinct opinions on how it may be headed:
I'm not much for head-and-shoulder patterns because they are everywhere the amateur chartist wants to see them. That said, the one that crude has been tracing out this year is a humdinger, and it looks as though it could descend at least one more level, to around 94, before some serious base-building begins. Traders using the Hidden Pivot Method don't necessarily have to hold a bearish bias, however, since it's possible to initiate a long position at any time and with relatively little risk by jumping on uptrending abc patterns on the very lesser charts. If a countertend opportunity does await us, I should think it would occur following a breakdown beneath last May's 95.59 low. Just about everyone would be bearish at that point, but it could prove to be the shakeout that lightens the load for a decent bounce. Meanwhile, the 15-minute chart suggests still-lower prices impend over the near term, possibly after a brief rally for the sake of symmetry. Maybe not, though, since the short-squeeze rally from yesterday's 95.90 low chickened out an inch shy of exceeding a tiny external peak at 96.82 visible on the 15-minute chart. Not exactly a sign of robust health.

Click on chart for large image (w/o added support lines) at Rick's Picks.
crude-daily-ricks-picks-2014-aug-12-600x360-support

  • Trouble on the Margin? (James T. Tierney, Jr., Context, Alliance Bernstein) Tierney sees labor tightness slowing profit margin growth and the continuation of the 2013-2014 profit margin expansion is likely peaking. This was discussed yesterday (see next article) where a peak was not considered.

profit-margins-sam-ro-2014-aug-11


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