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What We Read Today 27 November 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.

  • UPDATE 6-OPEC heading for no output cut despite oil price plunge (Alex Lawler, Amena Bakr and Rania El Gamal, Reuters) OPEC Gulf oil producers will not propose an output cut on Thursday, reducing the likelihood of joint action by OPEC to prop up prices that have sunk by a third since June. Iran sees an oil glut next year and argues that some OPEC members are battling for market share.

  • ACA approval hits record low as those with HIX plans satisfied with coverage (Brian M. Kalish, Employee Benefit Advisor) Americans' approval of the Affordable Care Act is at a record low yet those uninsured who purchased coverage through the exchange are overall pleased with the quality of coverage they obtained. Gallup Poll says that 37% of Americans approve of Obamacare while 56% disapprove. A separate Gallup poll of those who newly obtained insurance through ACA found 75% are satisfied (rated either excellent or good) with coverage and cost. Is this situation a case of the ignorant being informed only by political propaganda? Or do a significant number of those dissatisfied but not participating really understand what is going on? Perhaps the polling should ask more questions. We will have more on this as we find additional information. See next article.
  • 'Solid' Obamacare start: More than 1M apply in first week (Dan Mangan, CNBC) More than 1 million submitted applications for eligibility during the first week of the new open enrollment period which started 15 November and more than 45% of those have already selected ACA (Affordable Care Act) health insurance plans on A little less than half of the plans selected (for 221,820 people) were for first-time insurance buyers. The report does not identify how many of the 240,305 returning customers were renewing 2014 coverage and how many were changing plans. The numbers do not include activity on exchanges operated by 13 states plus the District of Columbia. The number of insurance plans selected in the first week this year was more than four times the number selected in the first month in 2014 when was plagued by operational problems.


  • Articles about events, conflicts and disease around the world


Ebola vaccine from Glaxo passes early safety test (Reuters)


Tunisia Voter Turnout High (64%); Second Round Runoff Will be Held (Tunisia Alive)

Tunisian youth skip presidential vote (Al-Monitor)


Former police chief speaks out about Turkey’s 'parallel state' (Al-Monitor)


The Syrian Conflict and the Ascendancy of the Lebanese Armed Forces (Middle East Institute)


Syrian Regime Bombards Islamic State Stronghold (The Wall Street Journal)


Domestic pressures in U.S., Iran threaten slow-moving nuclear talks (Reuters)

Republicans push for new Iran sanctions (Geoff Dyer, Financial Times)


Nato commander warns Russia could control whole Black Sea (BBC News)

Surge in US armored vehicles next to Russian borders (RT)


GDP growth to slow to 5.1 pct, but no rate cut yet - Reuters Poll (Reuters)

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

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  • Why Jeremy Grantham is Right about Corporate Profit Margins (Baijnath Ramraika and Prashant Trivedi, Advisor Perspectives) Another good analysis of how short-termism in corporate management is destroying American business. With corporate profits being approximately 2 standard deviations above the mean for most of the past ten years restoring a continuation of the mean will eventually require a sustained period of below-average profit years.
As the world moved increasingly towards the idea of shareholder-value maximization, time horizons for management and the shareholders have shortened. As Montier shows, the average lifespan of a company in the S&P 500 in the 1970s was about 27 years and is down to about 15 years now. In tandem, the average tenure of CEOs is down from about 10 years in the 1970s to about 6 years now. Combine this with the incentive systems prevalent today (think stock options), and it is only logical that a CEO who is going to be around for as few as six years and is going to get a large chunk of her rewards in stock options will want to see higher stock prices. Cutting SGA expenses and postponing capital investments -- actions that carry positive short-term earnings impact at the expense of a business' competitiveness in the long-term -- look promising to managers whose payoffs depend on stock prices in the short-term. Not surprisingly, the renters (there are hardly any owners any more) clamor for just such actions.


  • The Six Biggest Washington Myths (Advisor Perspectives) Article perpetuates one myth itself: "The government is reluctant to tackle social security and Medicare “which will eat us alive in the next decade"."
  • EU unveils 315 bln euros investment plan to boost jobs, growth (xinhuanet) This new program will use €21 billion from the EU budget and €5 billion from the EIB (European Investment Bank) to create a European Fund for Strategic Investments (EFSI). The fund will create at least €315 billion of additional investment over the three years 2015-2017. according to the European Commission. The focus of the Fund will be on the investment in infrastructure, notably broadband and energy networks as well as transport infrastructure in industrial centers; education, research and innovation; and renewable energy and in SMEs and middle capitalization companies. The European Commission claims that historical experience indicates the multiplier effect for the EFSI will be 15, thus turning the €21 billion into €315 or more of investment. Is there any "new normal" factored into this estimate?
  • An Intermarket Approach to Beta Rotation The Strategy, Signal and Power of Utilities (Charles V. Bilello and Michael A. Gayed, 2014 Charles H. Dow Award Winner) here is still another demonstration of the fallacy of the Efficient Market Hypothesis for which proponents argue that no strategy can consistently outperform a simple buy-and-hold investment in broad stock market averages over time. This study, from 1926 to 2013 shows that the rolling outperformance of the utility sector can be exploited. Over the 87 years ending July 2013 the strategy returned 49x as much as buy-and-hold in the utility sector and 26x as much as buy-and-hold the broad stock market. They point out this corresponds to an average outperformance per year of 4.9% compared to the total stock market. There are periods of underperformance (18% of the rolling 3-year periods) - see second graph below. The paper does not report drawdowns but from the first graphic below a rough estimate is that they may be comparable to the two buy-and-hold references. Here is the statement of the rotation strategy employed:
When a price ratio (or the relative strength) of the Utilities sector to the broad market is positive over the prior 4-week period, position into Utilities for the following week. When a price ratio (or the relative strength) of the Utilities sector to the broad market is negative over the prior 4-week period, position into the broad market for the following week.



  • Goldman, BASF, HSBC accused of metals price fixing: U.S. lawsuit (Jonathan Stempel, Reuters) No, it's not the "justice is blind" U.S. Department of Justice that is bringing action against these price fixers, it is a class action initiated by a maker of jewelry and police badges. Econintersect suggests that soon there will be a class action suit filled by organized crime against the major banks requesting compensation for revenue lost to "unfair competition".
  • US Congress considers host of tax breaks (Robin Harding, Financial Times) The lame-duck Congress (Democratic Senate and Republican House) are reportedly close to a deal that would make permanent (and actually expand) a number of tax breaks that have been subject annual reviews until now. Included in these are R&D tax credits to companies, state sales tax deductions for personal income tax returns, as well as college tuition credits and mass transit tax breaks. But President Obama has threatened to veto the bill because it doesn't make permanent earned income and child tax credits for low income families. The proposed changes would increase future deficits by amounts greater than the current baseline expectations, which will start increasing again later this decade after reaching a minimum over the next couple of years.


  • Martin Wolf on the Financial Crisis: The Fire Next Time (Michael Edesess, Advisor Perspectives) Michael Edesess has contributed to GEI. Edesess reviews why Martin Wolf thinks the financial crisis of 2008 is far from over and will be back with even more devastation in the future. The reason: The global financial structure is out of balance and unsustainable. Without radical change, Wolf thinks crises will keep recurring until "world economic order collapses". What is out of balance? To overly simplify the argument, there is more money in the world than is needed for investment so savings exceeds investment and results in bubbles in "non-tradable goods", such as real estate, stocks and bonds, etc. Edesess draws out the interrelated details of what is going on in Asia, Europe and the U.S. with great clarity. This is an article that is well worth spending some time with. It is not overly long and can read and studied in perhaps 15 minutes time.
  • Cheap energy is the new cheap labour (John Gapper, Financial Times) Can cheap energy in the U.S. drive a competitive advantage for America much the way that cheap labor has driven China's economy over the past two decades? The effects may be muted by the fact that energy is a smaller component of production cost for many goods than is labor.
  • Oil wars as GFC 2.0 (House and Holes, Macro Business) In 2011 Oliver Wyman predicted at Davos that the next GFC (Great Financial Crisis) would occur in 2015 with a massive collapse of commodity prices. This forecast was made as a commodities boom was underway - see graphics below. Now loans in the energy sector are starting to go bad - see Oil price fall starts to weigh on banks (Tracy Alloway, Financial Times). Loans that are in certain currencies that have declined are especially prone to distress as repayments are made in depreciated currencies with income from petroleum sales that have declined precipitously in dollars. Oil producer loans in currencies such as the Russian ruble (down 27% since June), the Norwegian krone (down 12%) and the Nigerian naira near a record low are especially exposed. Stocks of many energy sector companies have fallen. Mentioned specifically in the article are Chevron (NYSE:CVX) down 15% since the summer, BP (NYSE:BP) Down 24% and Seadrill (NASDAQ:SDRL) down 57%. A number of bonds are now trading at discounts. Macro Business called Oliver Wyman the loneliest man in Davos. Maybe he will receive more attention in the future.


  • Other Economics and Business Items of Note and Miscellanea

It’s a New America, sharing the worst aspects of the Old: police executions on the Street (explicit video) (Fabius Maximus) Several disturbing videos.

Why the battle against obesity is coming apart at the seams (Financial Times)

Investors Beware: Catalan Independence Could Negatively Impact Economy (ThinkAdvisor)

Gasoline from sawdust (R&D)

REVEALED: The Demographic Trends For Every Social Network (Business Insider)

WTO postpones trade deal by a day after last-minute objection (Reuters)

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