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What We Read Today 01 May 2015

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.

This feature is published every day late afternoon New York time. For early morning review of headlines see "The Early Bird" published every day in the early am at GEI News (membership not required for access to "The Early Bird".).


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Articles about events, conflicts and disease around the world



  • Gray's Death Ruled a Homicide; Six Officers Charged (Bloomberg)  One officer (the van driver) was charged with second-degree murder.  Others with manslaughter, assault and misconduct.   In addition State Attorney Marilyn J. Mosby said officers had no probable cause to arrest Gray on April 12.  He was detained for allegedly carrying an illegal switchblade, but Mosby said the knife was legal.
  • Why You Want To Own Facebook Rather Than Google (Seeking Alpha)  Read why this investor argues that it is better to own Facebook than Google, which has 30x the revenue.
  • GMO’s Grantham: Some Boom Left Before the Doom (ThinkAdvisor)  Everybody's got a guess.  Grantham is a Hedge fund manager who thinks the market will rise another 8% before the bubble bursts, leaving a legacy of multiyear negative real returns.
  • Tesla's Powerwall Event:  The 12 Most Important Facts (Bloomberg)  Musk says:  "The issue with existing batteries is that they suck."  We will have more on this in the coming days.




  • The EU may soon have Gazprom and Vladimir Putin running on fumes (Reuters)  The European Commission has charged Russian government owned Gazprom with abusing its dominant market position and overcharging customers in several countries.  Russia's ability contest and also to pay the huge fines that could result are limited in its current economic constraints.



  • Thousands still missing after Nepal earthquake (Al Jazeera)  Officials say aid reaching affected areas too slowly and estimate total cost of recovery effort at $2 billion.  Econintersect:  Prorated to GDP, the equivalent cost in the U.S. would be over half a trillion dollars.

Sell in May and Go Away: It's True But Here's Why You Should Ignore It (Trang Ho, Forbes)  Trang Ho has contributed to GEI.  The adage is true over long periods of time but there are shorter periods of time when it is not.  One example given by Trang is May being the top return month of the year for 13 consecutive years 1985-1997.  The graphic shows the return track through the calendar for the most recent 65 years, along with the 15 pre-election years (presidential elections) of which 2015 is one, and the 7 pre-election years when a Democrat was in the White House (again like 2015).  Econintersect:  The volatility may look much greater for the pre-election years but that is most likely an artifact of the smaller data sets.  See also next article.


Can the ‘Presidential Cycle’ Boost Stocks? (The Wall Street Journal)  In the article above the graph shows much better returns in the pre-presidential election year since 1950.  This article confirms that the effect is true when all the data back to 1900 is included:  The third year of the presidential cycle is the best for stocks on average.  The emphasis is important.  For Pres. Obama the third year of his first term was the worst year for stocks during his tenure.  Using the table at Wikipedia, the S&P 500 return for 2011 is listed as 0.00%.  All other six years of his presidency had double digit returns (average = 15%).  In the graph below the first year of each presidential cycle has hadd the lowest return by a small margin.  For Obama the two first years have been the best by far, averaging 26.5%.  Lesson:  Only a fool will try to use long-term averages to predict short-term results, even in flipping a coin, say nothing of stocks.  Also, you should be remebering the oft repeated disclaimer:  "Past performance is no guarantee of future results".  That is actually a misleading statement because the word "guarantee" insinuates that their might still be some likelihood (just less than a guarantee).  The much better statements which are not misleading (and we have seen such wording):  "Past performance is no indication of future results".


Think Active Can't Outperform? Think Again (  Invesco conducted an extensive study of approximately 3,000 equity mutual funds over the past 20 years (covering five distinct market cycles) to investigate the performance of "high active share" funds.  They found that 61% of high active share funds outperformed benchmarks over the 20 years.  The reason for this was significantly because of less down-market losses (better "downside capture").


(a)  High active share funds are those whose holdings held 60% or more stocks that were not specifically held by the benchmark

(b)  Downside capture refers to losing less money in a down market than the benchmark.

Econintersect:  This study is confusing because it says that active management outperforms but, it appears to us, what is being studied is a process of comparing the values of investing using new and different indexing formulas.  It is not clear that "high active" management is anything more than using different indexing.  How much trading occurs in the funds followed in this study?  Unless there is significant trading beyond what is required to maintain a specified index, then the study is not comparing active to passive management, but is instead comparing how different indexes behaved.  Since 60% or more of the stocks in high active management funds are different from the S&P 500, the latter cannot be a representation of passive management for the former.  It is a benchmark for active management funds containing substantially the same stocks which can vary in allocation against the distribution within the index.  It appears that the Invesco study is not delivering exactly what the title implies about "active" management.  It is a study which may indicate that there are new and novel indexes, some of which outperformed the S&P 500 through the time period studied.  Active management within these new indexes?  It is not clear how much actually occurred.

Business @ the Speed of Thought (Markus Kirjonen) Bill Gates published a book in 1999:  Business @ the Speed of Thought.  This is a review of that book by a student in Finland, which is well worth reading.  In the review Kirjonen lists 15 predictions made by Gates in the book.  Before you look through the list, think back to what the world was like in the late 1990s and then marvel at how prescient this list really was:


  1. Automated price comparison services will be developed, allowing people to see prices across multiple websites, making it effortless to find the cheapest product for all industries.
  2. People will carry around small devices that allow them to constantly stay in touch and do electronic business from wherever they are. They will be able to check the news, see flights they have booked, get information from financial markets, and do just about anything else on these devices.
  3. People will pay their bills, take care of their finances, and communicate with their doctors over the Internet.
  4. “Personal companions” will be developed. They will connect and sync all your devices in a smart way, whether they are at home or in the office, and allow them to exchange data. The device will check your email or notifications, and present the information that you need. When you go to the store, you can tell it what recipes you want to prepare, and it will generate a list of ingredients that you need to pick up. It will inform all the devices that you use of your purchases and schedule, allowing them to automatically adjust to what you’re doing.
  5. Constant video feeds of your house will become common, which inform you when somebody visits while you are not home.
  6. Private websites for your friends and family will be common, allowing you to chat and plan for events.
  7. Software that knows when you’ve booked a trip and uses that information to suggest activities at the local destination. It suggests activities, discounts, offers, and cheaper prices for all the things that you want to take part in.
  8. While watching a sports competition on television, services will allow you to discuss what is going on live, and enter contest where you vote on who you think will win.
  9. Devices will have smart advertising. They will know your purchasing trends, and will display advertisements that are tailored toward your preferences.
  10. Television broadcast will include links to relevant websites and content that complement what you are watching.
  11. Residents of cities and countries will be able to have Internet-based discussions concerning issues that affect them, such as local politics, city planning or safety.
  12. Online communities will not be influenced by your location, but rather, your interest.
  13. Project managers looking to put a team together will be able to go online, describe the project, and receive recommendations for available people who would fit their requirements.
  14. Similarly, people looking for work will be able to find employment opportunities online by declaring their interest, needs, and specialized skills.
  15. Companies will be able to bid on jobs, whether they are looking for a construction project, a movie production, or an advertising campaign. This will be efficient for both big companies that want to outsource work that they don’t usually face, businesses looking for new clients, and corporations that don’t have a go-to provider for the said service.

Other Economics and Business Items of Note and Miscellanea

Fewer Than 50% Of Parents Are Saving For College! (Michael Haltman, LinkedIn)  Michael Haltman has contributed to GEI.  The percentage is down significantly since 2009.  And the average amount put aside for college is about $10,000.  This is enough for current average costs for one semester at public universities and enough for about two weeks at the most expensive private institutions.  

What’s Really Behind the Flash Crash Trader Prosecution? (Pam and Russ Martens, Wall Street on Parade)  Hat tip to Roger Erickson.  The Martens have contributed to GEI.  As we (Econintersect) commented when the story broke, this looks like a selective ticket for speeding where one or two cars out of hundreds exceeding the speed limit by 15 mph are pulled over and issued citations.  That is similar to what the Martens think, as well.

The Justice Department’s case against the 36 year old lone bedroom trader in the U.K., Navinder Singh Sarao, has now been thoroughly discredited by every Wall Street veteran who has studied it, most pointing out that what Sarao did is happening every second that Wall Street is open for business. Business writers at the New York Times, Financial Times, Newsweek, and Bloomberg View have given the charges an unequivocal thumbs down.

The Martens point out that the complaint itself is highly unusual:  It is only one page plus an afidavit from an FBI agent.  And no Justice Department official has signed the complaint.  The Martens continue:

The case is based largely on analysis from an unnamed “consulting group” and a “professor and academic researcher who studies and has written extensively on financial markets and algorithmic trading.” Given the public drubbing of this case, that professor is now likely climbing deeper into his hole of anonymity.

There are a lot of damaging speculations by the Martens about what Wall Street evils might be behind this and other "small fry" cases pursued with relentless diligence by the DoJ while the "big fish" swim free except for billions paid in "protection money".  Related articles follow.

The Flash Crash Trader Has Strong Defense Witnesses (Pam and Russ Martens, Wall Street on Parade)

Eric Holder’s Coup de Grâce: Arresting a Bedroom Trader for the Flash Crash (Pam and Russ Martens, Wall Street on Parade)

‘Flash Crash’ Trader Navinder Sarao Ordered to Remain in Custody After Failing to Pay Bail (The Wall Street Journal)  U.S. authorities accuse trader of making $40 million through manipulation of futures market yet he remains in jail unable to raise $7.7 million for bail.

Flash Crash Report Raises Flags on Quasi Stock Exchanges Inside Wall Street Firms (Pam and Russ Martens, Wall Street on Parade)  This is a 2010 article about another fiasco attempt to pin the stock market flash crash on an insignificant small trade while ignoring the possible roles of large firms.

CME Suspends Traders for Alleged Sarao-Like Manipulation (Bloomberg)  CME Group Inc. said it suspended two traders for placing manipulative trades similar to the ones that catapulted Navinder Singh Sarao into headlines around the world last week. Heet Khara and Nasim Salim engaged in a practice called “layering,” in which orders are placed with no intention of following through on them.  Previous news and cases: 
- SEC Charges N.Y.-Based Brokerage Firm with Layering (SEC, 25 Sept. 2012); 
- FSA fines Swift Trade £8m for market abuse of 'layering' (The Guardian, 31 August 2011);
- Alleged layering of the order book: Guidance to member firms under Rule C020 following recent disciplinary action (London Stock Exchange, 29 June 2009);
- Canadian Man Charged in First Federal Securities Fraud Prosecution Involving ‘Layering’ (FBI, 13 January 2015);
- "Layering", Spoofing, Spiving & "false" market orders (BlackRaven, 24 July 2013); and
- Layering Of Order Book And Spoofing Now Under The Spotlight With Launch Of New SMARTS Alert (mondovisione, 24 February 2010).

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