FAA Set To Approve ‘Limited’ Commercial Drone Use In US Skies

Citing "tangible economic benefits," the FAA has decided that the current prohibitions against commercial uses of drones in US skies can be lifted. As WSJ reports, Federal regulators said they are considering exempting a handful of companies working for the film and television industry with proposed rules for small drones are expected to be issued by the end of the year, though they aren't likely to become final until 2015 or later. While law-enforcement agencies already can rely on procedures to obtain FAA approval to fly some of the largest models in designated airspace, this shift by the FAA opens the door to the thousands of drones expected to plague US skies in the next few years.

 

As The Wall Street Journal reports,

Federal regulators said they are considering exempting a handful of companies working for the film and television industry from current prohibitions against commercial uses of drone aircraft in U.S. skies.

 

Monday's move by the Federal Aviation Administration doesn't immediately end those restrictions. But it signals that the agency, after months of controversy and pressure from drone proponents to allow some limited commercial flights, is looking to end the legal logjam by fairly quickly authorizing some independent cinematography companies and individuals to use drones.

 

If the exemptions are granted, such photo and video applications would have for the first time explicit FAA approval under specific conditions. The decision could open the door to other industry-by-industry exemptions—something drone manufacturers and users have been advocating for some time.

 

 

In its announcement, the FAA cited the "tangible economic benefits as the agency begins to address the demand for commercial [drone] operations." But the agency said all "associated safety issues must be carefully considered to make sure any hazards are appropriately mitigated" before the FAA gives the green light.

 

The FAA said the Motion Picture Association of America "facilitated the exemption requests on behalf of their membership."

Of course, there's always the privacy concerns…(via The Washington Times)

The Association for Unmanned Vehicle Systems, the leading trade group for the nation’s private-sector drone operators, estimated this year that the commercial drone industry will create more than 100,000 jobs and generate more than $82 billion in economic impact over the next 10 years — if the government moves quickly to establish workable operating regulations and safeguards.

 

The impending boom has raised concerns among privacy advocates about how and where drones might be used to collect data. The FAA is requiring future test sites to develop privacy plans and make them available to the public. The policy also requires test site operators to disclose how data will be obtained and used.

 

“Make no mistake about it, privacy is an extremely important issue and it is something that the public has a significant interest and concern over and we need to recognize as an industry that if we are going to take full advantage of the benefits that we are talking about for these technologies we need to be responsive to the public’s concerns about privacy,” Mr. Huerta said.

But then again "tangible economic benefits" will trump any of those concerns… we are sure.




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The Truth Behind The Q1 Earnings Numbers

Submitted by Lance Roberts of STA Wealth Management,

 




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Massive Explosion Rocks Shell Oil Production Plant In The Netherlands

Moments ago a massive explosion, accompanied by a raging fire seen from miles away, occurred at a Shell Oil production plant in Moerdijk, Netherlands, reports the Omroep Brabant. Two “enormously loud bangs” were reported by bystanders. Bystanders reported a pink flash of light followed by flames that were meters high.  According to a Dutch reporter, the explosion shook the neighborhood houses as if an earthquake occurred. Marieke van Wijk of the Safety Mid and West Brabant reports that the fire occurred during an exchange of services.

“The blaze is pretty intense and the smoke goes straight up. Hazardous substances are igniting high in the air. “Stay at least always the smoke,” adds the municipality of Moerdijk.

No evacuation of local residents has been ordered so hopefully the damage is contained.

This is what the facility looked like before the accident:

 

And this is what it looks like right now:











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Unleash The Angry Greek Cleaning Ladies…

It would appear there is only so much the Greek people will stand for. With a fragile coalition increasingly tilting to a more euro-skeptic (give us more money or else) perspective, the cleaning ladies of Greece have exploded onto the streets with great vengeance and furious rebukes at the riot police. The reason for this chaos – they were asked to clean up this mess in the finance ministry…

 

 

As RuptlyTV notes,

Janitorial staff in Athens obstructed the entrance to the Ministry of Finance on Tuesday. Riot police attempted to push the cleaners away but were unable to move them.

 

The cleaners have been running a campaign of civil disobedience since the Ministry of Finance formally dismissed between 400 and 600 cleaning staff last month. The cleaners had already been suspended from work last year in preparation for the move.

 

Despite the Greek Supreme Court finding the mass layoffs illegal, the ruling has not been accepted by the government.

Perhaps someone should tell them the Greek stock market is up and bond yields are very low… we are sure that will appease whatever angst caused this… aside from the record unemployment, soaring taxes, record suicide rates, and record emigration.




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Treacherous Market Conditions Ahead

From Scotiabank’s Guy Haselmann

Treacherous Market Conditions

Vanishing QE Matters

When the latest round of QE was announced in September of 2012, the economy was healing. Considerable progress had been made toward the Fed’s dual mandates and the FOMC was already providing extraordinary accommodation through two policy actions, ZIRP and forward guidance. At the time, I thought the action was overkill and bordered on recklessness.

I wrote that open-ended QE (dubbed ‘QE-infinity’) was dissimilar to the earlier QE programs for three reasons: 1) it began under much different economic and financial conditions; 2) its open-ended time frame hijacked the markets’ typical price discovery and discount mechanisms; and 3) it began after earlier actions had already changed investor behavior. At the time, moral hazard was already alive and well.

Financial assets are valued simply by aggregating the discounted value of future cash flows. The fact that the FOMC did not give QE (and thus ZIRP) an end-date meant that price discovery for financial assets were demolished. Investors increased their ‘melt-up’ mentality, because the discount rate used to value cash flows could be assumed to be zero in perpetuity. Dividing a number by zero equals the empty set. Investors were not willing to ‘fight the Fed’ and why should they; the Fed was showing determination to stay the course until it was satisfied with the pace of the recovery.

Yet, the US and global economies have only been able to muster sub-par growth despite massive (pre-2014) coordinated accommodation. Shouldn’t investors today worry more about how the global economies will perform now that QE is ending, China is reeling-in its credit bubble, Japan has initiated the first of a series of VAT hikes, and EM central banks have hiked rates?

Investors and portfolio managers constantly ask what the timing associated with, or what the catalyst will be, that derails the asset rally. Last year, I suggested it would be when the Fed began exiting from QE-infinity. Clearly, the catalyst is in the rear view mirror. Moreover, it is accompanied by the other factors mentioned in the preceding paragraph. The purpose of this note is to serve as a reminder that the time is now and the catalyst(s) have set the wheels in motion. Risk/reward is skewed to the downside. With these ‘policy pivots’, investors should demand a higher burden of proof that the economy and risk assets can stand on their own. Investors should forget trying to determine valuation. Weak growth mattered little to the surge in risk assets during the last few years. In addition, the ‘P’ and the ‘E’ are distorted by Fed policy and ZIRP-induced share buybacks; and thus should be de-emphasized. The bottom line could simply be that QE means ‘risk-on’, while ending QE means ‘risk-off’.

Expecting Too Much of the FOMC

Markets afford the FOMC too much reverence. I am confident that the Fed is overpromising and over-reaching on what it can actually deliver. It has always been quite a leap of faith to believe that ever-rising asset prices would create a wealth effect adequate enough to boost consumption, so as to make progress on the Fed’s dual mandates without causing adverse financial markets conditions.

An apt analogy to the Fed’s visible efforts might be the World Cup referee who early in the game tries to maintain order by calling a tight game, but continues blowing the whistle so frequently that the referee becomes the show. After a while, the fans begin gauging the validity of every disruptive whistle, rather than spectating on the beauty of the game. A good referee is typically one who went unnoticed during the game or one who was quickly forgotten once it ended.

It is confounding to me why markets have so much confidence in the Fed’s ability to fix the complicated ailments of the economy, especially given its limited tools. One FOMC member told me two years ago that “my colleagues want to be looked at, as if, they are doing something {to achieve their dual mandates}; even though they know that the benefits are quite small”. Such credence, however, fails to adequately consider the negative aspects of the policy action.

I believe the FOMC has chronically miscalculated the relationship between the short-term economic benefits and the longer-term financial market costs of its policies. How much are Fed policies sacrificing future consumption at the expense of benefits today? To what extend are Fed policies fueling generational and social-class inequalities?

I suspect that the Fed has been hoping that economic fundamentals would improve enough by the time QE was brought to an end to validate the artificially elevated asset prices that QE created. What if the FOMC is pulling back from its QE program, because members fear that its policies are building risks to financial stability at a faster pace than the economy is improving? If so, many investors are wrong-footed.

Measuring Moral Hazard

Investors have had a remarkable run during the last 4 years of risk-seeking, don’t-fight-the-Fed strategies. Yet, investors should not believe that the FOMC has a handle on the magnitude of the moral hazard and risk positions that have been built over this period. The Fed’s concern around the market’s reaction-function to QE is likely a major factor as to why the FOMC is tapering at a gradual pace. As such, the Fed probably wishes QE was already completed. It would certainly improve the FOMC’s flexibility.

Does the pace of tapering really matter? Will it have a material impact on valuations or the aggregate economy if the Fed is buying $65, $45 or $25 billion of assets in month X, Y, and Z respectively?

FOMC members want markets to believe that they are “data dependent”, but such verbiage could be a ‘slight-of-hand-trick’; espoused so that too much focus is not paid to the fact that the QE program is ending. This might be the reason that markets not reacted to the catalyst(s) to pare risk or why they have been slow to act. Despite Fed rhetoric, investors must realize that the hurdle to deviate from its $10 billion per meeting pace has always been enormous.

The market’s unremitting focus on every adjective and word uttered by the FOMC is inane, simply because the Fed is on a steady course for the next 6 months. This is a clear example that the FOMC has become too visible and too involved in financial markets. The ECB recognized that there are negative consequences to such market interference. Draghi stated that he could envision fewer ECB meetings, because he felt that their frequency leaves the market expecting action too often.

Self-Inflicted Quagmire

The Fed’s chronic desire for slack-less growth has stair-stepped official rates to zero over the last few decades, has made (unconventional) accommodative measures seem necessary, and has resulted in a depleted arsenal. Hence, the FOMC is at a critical juncture; and FOMC members have only themselves to blame for being in such a position.

The Fed’s ability to reverse any new ebb in economic activity in the future is now severely limited, increasing the importance that current Fed initiatives succeed. This is likely the justification for QE-infinity. Today, the Fed has little choice but to stay overly accommodative even if the economy heals satisfactorily. With this in mind, most expect the economy to heal and are preparing for the inflation battle. However, such an outcome is not assured and big problems will arise should the economy sputter.

Boom to Bust and Back Again

Prior to 2008 (under Greenspan), the Fed believed that the financial sector was mostly self-stabilizing and that bubbles were un-identifiable. The FOMC believed that, if necessary, they had the ability to ‘clean up’ after excesses (i.e., bubbles popped). Greenspan’s Fed believed that it had the adequate tools for ‘after-the-fact’ crisis management; which it believed was always more appealing than making the politically difficult decisions that would have been necessary to prevent financial crises or imbalances in the first place.

After the 2008 crisis, policymakers have tried to end this mindset by becoming more proactive in trying to prevent financial crises. Though well-intentioned, this new approach has arguably led to Fed policy itself becoming a source of systemic risk. In such, I believe the Fed’s atlas-complex and micromanagement are fermenting dangerous market conditions that have sown the seeds of the next market upheaval.

The Inverted-U Curve

If I had to graph the beneficial effects of (excessive) regulation and interventionist central banks and governments, I suspect it would have the shape of an inverted-U. Like most good things in life, a little is fine, but too much can kill you. There are often cumulative effects where short term benefits marginally decrease over time until eventually they turn into ever-mounting negative longer-term consequences.

The basic logic behind the inverted-U curve is that strategies that initially work well stop working past a certain point. Maybe a non-financial example would be useful. Criminologists often argue that punishment has inverted-U curve characteristics. Studies show that there are benefits to imprisonment, but lock up too many people for too long and the collateral damage starts to outweigh the benefits.

There are direct and indirect effects to incarceration. The direct effect prison has on crime is that it puts a bad person behind bars, where he can’t victimize anyone else. However, longer sentences work only on young men, because studies suggest that once someone passes the crucial mid-twenties age, all longer sentences do is protect society from dangerous criminal at the point that they become less dangerous.

The indirect effect on crime has to deal with how a person’s imprisonment affects all the people with whom that criminal has a relationship. A high number of those incarcerated are fathers and it has a devastating effect on his children (even one-fourth of convicted juveniles have children). Earnings –both from crime and legal jobs – also no longer support families. Having a parent incarcerated increases a child’s chance of juvenile delinquency by 400% and the odds of a serious psychiatric disorder by 250%.

Negative second-order consequences are always harder to measure and identify. Nevertheless, I firmly believe the FOMC policy has far surpassed its period of net benefit. I believe it is the second-order negative unintended consequences that will soon appear as the Fed implements its exit from QE.

Market Complacency

Many investors are sitting on their hands unsure of what to do; unsure how to value financial securities; unsure what the true price of money is; and unsure just how far governments are willing to go before popular backlash arises. Gillian Tett recently wrote in the Financial Times, “Far from being a sign of sunny confidence in the future, ultra-low volatility may show that investors have lost faith that markets work”.

It seems only fitting that Paul McCully, the man who coined the phrase “Minsky Moment” in 1998, returned to Pimco last week after several years of semi-retirement. A “Minsky Moment” is a collapse of asset values which is part of the credit cycle or business cycle. Economist Hyman Minsky argued that such moments occur because long periods of prosperity and increasing value of investments lead to increasing speculation using borrowed money. There might never be a Minsky Moment as clear and obvious as the one the Fed has created at this very moment under its brazen current policy experiment. Time will tell.

Investor Action

As I mentioned, risk assets need to prove that they can maintain their lofty valuations without the assistance of the Fed’s QE. For the balance of the year, Fed policy will deviate very little if at all, from its current path and this is regardless of whether 2014 GDP growth ends up at 1.5% or 3.5%. In other words, in terms of the path of QE, the Fed is far less data dependent then they are willing to admit.

Markets are likely headed for a difficult period as the FOMC tries to gradually wean investors off of its liquidity addiction. It is too late for the FOMC to do much other than to try to limit the damage. Investors, however, should use this year’s decision to begin the ‘taper’ as the catalyst to pare risk. Investors should monetize gains ASAP; and move to cash and higher up the capital structure. Investors should place a premium on liquid securities and emphasize return of capital exposures. Yes, it really is this simple.

During the past 3 years, investors used the Fed’s QE policy to seek risk in order to beat competitors and to outperform benchmarks. Today, the hot air of forward (guidance) promises is not an adequate replacement for the substance of a $1 trillion per year asset purchase program.

Peer and benchmark outperformance between now and October (end of QE) means that portfolio managers will need to have the courage to leave the (ever-inflating) risk-asset party. The risk versus reward distribution is unfavorably skewed; offering inadequate compensation for riskier assets. Moreover, risk-seeking trades are crowded and poor market liquidity conspires against the FOMC’s ability to navigate the smooth landing that it desires.




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Bears Tap Out: Assets At Bearish Funds Hit Record Low

Back in March we asked “what happens when this chart goes to zero” with regard the exuberant lack of bears in the AAII survey. The last 3 months have seen that sentiment morph into actual positioning as institutional investors have been net sellers of US equities since April leaving assets in bear funds at record lows.

 

 

As FBN’s JC O’Hara notes, it’s a sign of capitulation when there’s no one left to bet on a decline… and remember margin has already rolled over… meaning the levered longs are unwinding too…

 

Charts: dshort.com and FBN




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It’s Not The Economy; It’s “Treasury-Selling” Tuesday Stupid!

It's Tuesday – so bonds are red, idiot. Trannies (-0.9%), rather unusually, underperformed and on the back of yesterday's Russell 2000 weakness suggests beta-chasing muppets are less engaged. After yesterday's USDJPY recoupling, Treasury yields pushed higher once again and almost recoupled with stocks strength from last week. 10Y yields are up 12bps in the last 2 days – the worst 2 days in almost 7 months. The USD leaked modestly lower led by EUR strength. Copper gave back all its gains from the weekend's exuberant China PMI and oil, gold, and silver flatlined. VIX remains total decoupled from this last few days' exuberance. Volume was average – fed by the early plunge but faded rapidly as we levitated.  With regard to the red close for stocks on a Tuesday: it is rumored that a wrong seasonal adjustment factor was applied to today: it was really a Wednesday.

 

Quite a day for stocks… Trannies worst Tuesday in 4 months

 

Today's bounce in the Russell 2000 was off the 200DMA once again

 

It's not just US equities.. and not just 2014 that the idiocy of the Tuesday effect is occurring…

 

If 2014's historical performance is anything to go by, the rest of the week will be good for bonds…

 

USDJPY already recoupled and now TSY yields…

 

But VIX remains grossly decoupled from stocks as it appears the record highs are being accmpanied by plenty of protection…especially ahead of Draghi

 

Treasury yields were a one-way street – the worst 2 days in 7 months…

 

Copper dropped on the China PMI miss and commodities flatlined in general…

 

 

Charts: Bloomberg




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“Buying Time” Doesn’t Fix Financial Crises, It Makes The Next One Worse

Submitted by Charles Hugh-Smith of OfTwoMinds blog,

The strategy of "buying time so the financial system can heal itself" by protecting a systemically destabilizing financial sector has failed because it could only fail.

The core strategy of central states and banks to fix the Global Financial Meltdown of 2008 was to buy time: take extraordinary emergency monetary and regulatory measures to save the parasitic too big to fail banking sector and the rest of the crony-capitalist Wall Street parasites, and initiate an unprecedented transfer of wealth from savers and Main Street to the banks and Wall Street via zero-interest rates and credit funneled to the very players who caused the crisis.

The idea was that the system would "heal itself" if authorities simply "bought time" by saving the financial sector from its own predation. The second phase of "buying time so the financial system can heal itself" was to institute policies (ZIRP, etc.) that restored the financial sector's obscene profits and socialized its losses by transferring them to the taxpayers.

The terrible irony in the official strategy of "buying time so the financial system can heal itself" is the policies prohibit healing and guarantee the next financial crisis will be greater in magnitude than the last one.

There is only one way for any financial system to heal itself: enable the open market to discover the price of capital, credit, assets, collateral and risk. When participants finally discover the market price of their assets and collateral are much lower than the valuations claimed in credit bubbles, the market clears itself of bad credit and overvalued collateral in a market-clearing event in which overpriced assets are marked down, firms that overleveraged weak collateral are declared insolvent and liquidated, and creditors who can no longer afford their loans are declared bankrupt and their remaining assets liquidated to pay their creditors.

There is no other healing process but this one: enable transparent, open markets to discover the price of capital, credit, assets, collateral and risk and let those firms and individuals who overleveraged and made bets that blew up go bankrupt.

What "buying time" has done is destroy the market's ability to price capital, credit, assets, collateral and risk, stripping the system of the essential information participants need to make rational, informed decisions. By crushing the market's ability to generate accurate pricing information, central state and banking authorities have insured the system cannot possibly heal itself while maintaining perverse incentives that guarantee the next financial crisis will dwarf the previous one.

The official policy of "buying time" has another fatal flaw: it maintains a parasitic financial sector that expanded to a structurally unhealthy dominance over both the political and economic sectors. Once financial profits ballooned from a modest share of corporate profits to dominance, this enabled financiers and bankers to buy political protection of their skimming and scamming:

The strategy of "buying time so the financial system can heal itself" by protecting a systemically destabilizing financial sector has failed because it could only fail. The policies that "saved the financial system" only saved it from the healing process of the market discovering the price of capital, credit, assets, collateral and risk.




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Hilsenrath Confirms Fed Angry At Itself For Making “Market” Too Risk-Free

While the last 2 weeks have seen numerous Fed heads, most vociferously Bill Dudley, warning of ‘complacency’ in markets, fearsome of low volatility and worried about low risk spreads. Of course, investors don’t care – don’t fight the fed unless the fed tells you to sell, appears the mantra-du-jour. Feed communications are not working… and so they have left it to their mouthpiece – WSJ’s Jon Hilsenrath – to explain that they are indeed concerned at just how risk-free markets have become…”Federal Reserve officials, looking out at mostly calm financial markets, are starting to wonder whether tranquility itself is something to worry about.

 

As WSJ’s Jon Hilsenrath explains,

Federal Reserve officials, looking out at mostly calm financial markets, are starting to wonder whether tranquility itself is something to worry about.

 

So far this year the U.S. economy has suffered a brief economic contraction, the Fed has begun winding down a major bond-purchase program meant to spur growth, the Obama administration has clashed with Russia over its annexation of Crimea, China’s economy has slowed and the Middle East has become a cauldron of civil strife.

“Markets” don’t care…

Yet, looking at Wall Street stock and bond trader screens, the world looks like a model of stability.

The Dow Jones Industrial Average, up a steady if unspectacular 1% since the beginning of the year, has consolidated big gains registered last year. Yields on 10-year Treasury notes have fallen even though inflation—which typically sends bond yields up—has been inching higher from very low levels.

Other measures of risk aversion and market volatility show an especially striking sense of investor calm. The VIX, which tracks expected stock-market fluctuations based on options trading, has gone 74 straight weeks below its long-run average—a run of steadiness not seen since 2006 and 2007.

Moreover, the extra return that bond investors demand on investment-grade corporate debt over low-risk Treasury bonds, at one percentage point, hasn’t been this low since July 2007. The lower this “spread,” the less risk-averse are bond investors.

The Fed is worried…

The worry at the Fed is that when investors become unafraid of risk, they start taking more of it, which could lead to trouble down the road.

 

“This indicates a great deal of complacency,” Richard Fisher, president of the Federal Reserve Bank of Dallas, said in an interview. “When you get complacency you’re bound to be surprised at some point.”

But it’s the Fed’s fault…

The Fed has given root to the sense of calm by offering investors assurances that interest rates will stay low far into the future. Its policy statement says officials expect to keep short-term rates near zero for a “considerable time” after the bond-buying program, known as quantitative easing, ends later this year.

 

 

“It is a problem of their own making. They can’t have it both ways,” said Martin Barnes, chief economist at BCA Research, an investment-advisory firm. “If they want to sustain zero interest rates and push up asset prices, how can they expect to have that with no excesses and no risk taking?”

 

 

“I cannot tell you for sure when this does get unwound,” Mohamed El-Erian, former chief executive of the bond fund Pacific Investment Management Co., or Pimco, said in an interview of the recent period of market calm. “When it does we are going to be reminded of what happened last May and June.”

 

 

“My concern is that keeping rates very low into late 2016 will continue to incentivize financial markets and investors to reach for yield in an economy operating at full capacity, posing risks to achieving sustainable growth over the longer run,”

So – translating…

“we are very pleased you all benefitted from the irrational surge in stock prices, and plunge in corporate bond spreads but it’s got a little out of hand and we’d like you all to form an orderly queue and leave the building… do not panic”

So – how does the Fed fix this problem? We suggest QE-Next will be monetizing VIX futures…




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Ukraine Considers Declaring Martial Law In Donetsk, Luhansk

As the bloody violence drifts off the mainstream media’s headlines in the US – but escalates on the ground – it appears the situation has grown serious enough to prompt further intervention in the separatist-held south and east regions:

  • *UKRAINE CONSIDERS DECLARING MARTIAL LAW IN DONETSK, LUHANSK
  • *ACTING PRES. TURCHYNOV ISSUES ORDER ON STUDYING MARTIAL LAW

We suspect, following the over-running in Donetsk today that these actions will awaken Putin from his recent slumber… making this week’s D-Day celebrations even more tense.




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