Whi(t)ney Tilson Does It Again

After an incredible day in Herbalife – its best performance ever – following Bill Ackman’s “death blow,” none other than Whitney Tilson (who oddly has not been seen on CNBC for many months) has penned a letter to his investors explaining “why I am more confident of my Herbalife short position.” As a gentle reminder, Mr. Tilson entered his Herbalife short in December 2012 in the low $20s (shortly after Ackman’s initial pitch) and recently made it one of his firm’s largest short positions. It appears there are now two ways by which Herbalife shares implode – Ackman buys a ‘minority stake’ and ‘fixes it’ or Whitney Tilson gets on TV and shifts to a long position…

Whitney Tilson – Why I’m More Confident of My Herbalife Short Position Today

The Herbalife bears won the day yesterday and the bulls won the day (and then some) today. Yawn. This is why I run a diversified short book.

 

Over the past year and a half since his initial presentation, Bill Ackman and his team at Pershing Square uncovered a lot of great new information about the company and how it operates that neither I nor anyone else (nor even Ackman himself) knew, but much of this didn’t come through clearly in his presentation today (which you can watch here) for various reasons – just read any of the harsh media coverage. But I don’t care about the messaging – that can be fixed. I care about the substance.

 

To be short this stock (as I am), you have to believe two things:

  1. That the majority (not all) of this company’s operations are based on a pyramid scheme, false and deceptive marketing, etc.; and
  2. That regulators will act to shut the company down or at least seriously rein it in.

On these two measures, I have more confidence in this investment now than I did before his presentation. To put rough numbers on it, before today I thought there was a 90% chance #1 was true and a 70% #2 would happen, so that’s a 63% chance of this investment working out. Now I think the odds are 95% and 80%, meaning I think my odds have improved to 76% — so I’m perfectly happy to have a 25% larger short position (which the market took care of today – I didn’t have to do a thing!).

 

The main reason for my increased confidence is that I think Ackman showed convincingly that nutrition clubs (which he estimates account for as much as 50% of Herbalife’s U.S. business and nearly all of its incremental profits) are fundamentally not about genuine consumption of Herbalife products by people pursuing healthy lifestyles and weight loss (as the company would have you believe) but almost entirely by: a) Those pursuing the business opportunity (i.e., building a downline rather than real sales as, for example, Amway, Tupperware and Pampered Chef); and b) Their friends and family who are trying to support them.

 

And, critically, the business opportunity is being sold in a false and deceptive way in which mostly vulnerable, unsophisticated people are promised that if they just work hard and invest their time and money they are likely to become President’s Club members and earn $500,000 annually forever. There is, of course, no disclosure whatsoever about how much time and money the average person invests, the real financial characteristics of the average nutrition club (almost all lose money), and the likelihood of anyone ever earning $1 in revenue, much less breaking even, much less earning enough money to make it worth one’s time, and much less becoming a President’s Club member (approaching 1 in 100,000).

 

In short, Ackman present voluminous evidence that Herbalife is aggressively selling millions of people a promise of the American Dream but is instead giving them the American Nightmare – bleeding them dry and discarding them. This is the very definition of fraud.

 

The best analogy I can think of is a slimeball going around targeting people dying of a terrible illness and promising them that he has the cure – all they have to do is pay him $3,000, do what he says (or take the “medicine” or “treatment” he gives them), and they’ll be cured. In fact, scams like this are all too common – see this 60 Minutes expose, for example, of stem cell fraud. However, these frauds are mostly located overseas because, of course, they’re illegal here!

 

To be clear, this is not like Amway, in which a relative of mine, years ago, peddled Amway products to her friends and family (which we reluctantly bought to support her). She wasn’t pursuing the business opportunity, but rather, like the vast majority of Amway reps, was just selling products and making a commission. That’s the difference between legitimate multi-level marketers and pyramid schemes: are most of the people in it to sell products or for the business opportunity? The key thing Ackman showed today is that these nutrition clubs, which the company, analysts, and bulls point to as evidence of legitimate end demand, are really just fronts for people pursuing the business opportunity and few of the people coming to them are what any sensible person would view as real customers.

 

Nor is it like buying a lottery ticket (where people knowingly waste their money in pursuit of a big payday) because everyone who buys a lottery ticket knows what their odds are (close to zero). Could you imagine the outcry if the lottery ran ads of lottery winners saying, “Just pick numbers like I did and you’re certain to strike it rich! (And if you don’t, you’re a loser.)”

 

A final point: I think Ackman today rebutted the primary bull argument (which was the only lingering doubt I had): that if Herbalife were a pyramid scheme, there would be a ton of excess inventory in the system and one would see large volumes being sold at distressed prices on eBay and elsewhere. But now we know why: the majority of the product is actually being consumed – but not by real consumers, but rather millions of people (and their unfortunate friends and family) caught up in a vast scam that’s like a cult, with vast promises, huge rallies, etc.

*  *  *
It seems the ‘market’ disagrees… for now.

h/t ValueWalk




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Despite Warmest May/June On Record, Misses Blamed On “Unseasonably Cool” Weather

“Weather,” it appears is the new ‘dog-ate-my-homework’ no matter how much facts get in the way.

 

Compare NOAA’s “Facts” about the actual temperatures…

The world’s heat record was broken for a second consecutive month. With the exception of Antarctica, new temperature highs were recorded on every continent.

 

 

The National Oceanic and Atmospheric Administration (NOAA) released June’s results Monday, revealing an average global temperature of 61.2 degrees for the period. The result is 1.30 degrees higher than the 20th century average of 59.9 degrees, making this June the warmest in more than 130 years.

 

The same trend was seen in May, which experienced a 1.33 degree increase from the the average 58.6 degrees.

To Business leaders excuses…

ICSC’s Michael Niemira says unseasonably cool weather hurt consumer interest in summer merchandise despite clearance prices; may shift demand to back-to-school shopping.

 

[Harley Davidson] believes second-quarter U.S. retail sales were adversely affected by prolonged poor weather across parts of the U.S..

*  *   *

Or could missed sales expectations be a result of stagnant incomes and rising inflation?




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The Ivy League Is Overrated, Says Ivy-Dominated New Republic

"You, sir, have the boorish manners of a Yalie!"William Deresiewicz has written
an interesting essay titled “Don’t
Send Your Kid to the Ivy League
.” As a Michigan grad, I can’t
speak to how accurate his observations are about life at the Ivies
today. But he does have a lot of sharp points to make about elite
schools’ role in the American class system. At places like Yale and
Harvard, Deresiewicz argues, “diversity of sex and race has
become a cover for increasing economic resegregation.” Furthermore,
“The college admissions game is not primarily about the lower and
middle classes seeking to rise, or even about the upper-middle
class attempting to maintain its position. It is about determining
the exact hierarchy of status within the upper-middle class
itself.” The result, he writes, is “an elite that is isolated from
the society that it’s supposed to lead.”

The article appeared in The New Republic, a magazine
whose modern era began when it was purchased in 1974 by Martin
Peretz, who attended graduate school at Harvard. Peretz quickly
took over the editorial reins as well, serving as editor as well as
owner until he hired a Harvard alum named Michael Kinsley in 1979.
With Peretz staying on as editor-in-chief, the post of editor
traded back and forth for a dozen years between Kinsley and fellow
Harvard man Hendrik Hertzberg; in 1991, the job went to Andrew
Sullivan, who upon completing his undergraduate studies in his
native Englandearned both his master’s and his PhD at Harvard.
After Sullivan’s departure, power passed to two acting editors,
Peter Beinart and David Greenberg, both of Yale. The next
full-fledged editor, Michael Kelly, attended the University of New
Hampshire, which is not a part of the Ivy League. He was fired
after about a year, and the job then passed on to Franklin Foer
(Columbia) and Richard Just (Princeton). After Peretz departed the
magazine, ownership fell into the hands of Harvard grad Chris
Hughes, who purchased it in 2012, named himself
editor-in-chief, and brought back Foer as editor.

Deresiewicz’s article is subtitled “The nation’s top colleges
are turning our kids into zombies.” You really should read it.

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Independents Open Thread

Sorry no time for further explication, other than that I’ll be
in the hosting chair for tonight’s live episode of The
Independents
(Fox Business Network, 9 p.m. ET, 6 p.m. PT,
repeats three hours later), and we’ll talk about Flight 17,
Israel-Hamas, the Obamacare case, Arkansas vs. dentists, and
classic music pot-smoking events. Check it out!

Aftershow begins on http://ift.tt/QYHXdy
just after 10. Follow The Independents on Facebook at
http://ift.tt/QYHXdB,
follow on Twitter @ independentsFBN, we’ll
use your best Tweets during the show, and click on this page
for more video of past segments.

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Krugman’s Latest Debt Denial: Why His Two Magic Numbers Don’t Cut It

Submitted by David Stockman via Contra Corner blog,

Professor Krugman is at it again—–conjuring fairy tales about a benign long-term fiscal outlook. Notwithstanding that the public debt has surged from 40% to 75% of GDP during the six short years since 2008, he claims there is no reason to fret and that there is no debt spiral anywhere in the future. In part that’s because the Keynesian priesthood has declared that interest rates have down-shifted on a permanent basis. CBO has therefore dutifully incorporated this assumption into its long-term projections:

This (interest rate) markdown has the effect of making the budget outlook — which was already a lot less dire than conventional wisdom has it — look even less dire. But there’s a further point worth emphasizing: the CBO has just declared an end to the debt spiral.

Even accepting CBO’s “rosy scenario” outlook (see below), it’s not evident that it has declared an end to the debt spiral. In fact, it projects publicly-held treasury debt to soar from $12 trillion today to about $52 trillion by 2039. Most people would judge that a spiral. Indeed, as shown in the CBO graph below based on “current policy”, the public debt ratio is heading sharply upwards to more than 100% of GDP.

Federal Debt Held by the Public

So how does professor Krugman turn this dismal chart into an “all clear” reassurance–when it actually shows public debt heading to above WWII levels at a time when the baby boom is at peak retirement? Well, it seems that Krugman unearthed two numbers in a 182 page report that purportedly render harmless the $52 trillion of bonds, notes and bills that CBO projects will need to find a home at the historically low interest rates it forecasts for the next 25 years.

So we turn to Table A-1 on page 104 of the CBO report, and we learn that for the next 25 years CBO projects an average interest rate on federal debt of 4.1 percent and an average growth rate of nominal GDP of 4.3 percent. And this means no debt spiral at all.

A GDP growth rate higher than the average carry cost of the public debt sounds all good, but here’s the thing. Given outcomes during the 21st century to date, there is simply no plausible reason to believe that nominal GDP can grow at a 4.3% CAGR for the next 25 years. In fact, since the pre-crisis peak in early 2008, nominal GDP has grown at only a 2.5% CAGR, and even during the last two years when “escape velocity” was expected any day, the compound growth rate has been only 3.0%. Indeed, during the entire 14 years of this century—encompassing nearly two complete business cycles—-nominal GDP has expanded at just 3.8% per annum.

Needless to say, when you are crystal balling a quarter century ahead, CAGRs make a big difference, and that’s profoundly true of the Federal budget. Specifically, revenue is highly sensitive to nominal GDP growth because it is always money income, not real GDP, that is on the radar screen of the tax-man.

Thus, owing to the miracle of compounding under the CBOs 4.3% CAGR, nominal GDP is projected to amount to about $49 trillion by 2039. By contrast, if money incomes grow at a 3.3% CAGR, or at the upper end of the last seven year’s experience, nominal GDP a quarter century forward would be only $38 trillion. And at CBO’s 19.4% of GDP tax take on the $11 trillion difference—-that’s nearly a $2.0 trillion annual revenue shortfall by the terminal year.

At the same time, the spending side will be driven by the soaring social insurance tab for retiring baby boomers during the decades ahead, regardless of nominal GDP. Accordingly, CBO forecasts that outlays for Social Security and Medicare will rise from 8% to 11% of GDP during the next quarter century, and that this will cause primary Federal spending (i.e. ex-interest expense) to grow at a 4.8% CAGR.

But that’s where professor Krugman fairly tale of two magic numbers hits the shoals. Based on the above demographic/social insurance dynamics, CBO projects that non-interest Federal spending will rise from $3.3 trillion this year to about $10.3 trillion by 2039. Yet were nominal GDP growth to track the lower 3.3% CAGR suggested above, there would be little off-setting reduction in the primary spending path.

That is especially the case because CBO’s forecast continues to embody a modern version of “rosy scenario”—that is, it assumes that real output will grow at a 2.3% CAGR for the next 25 years. Yet that ignores the numerous and compounding headwinds lurking down the road. These include baby boom demographics and the massive overhang of $60 trillion of public and private debt domestically; and global troubles everywhere—from the bankrupting old age colony in Japan, to the tottering house of cards known as “red capitalism” in China, to the crushing burden of the socialist welfare state in Europe. Given these adversities, there is no reason to assume that US real growth will sharply accelerate from the tepid trends of the recent past.

To wit, real GDP has averaged only 1.0% annually since the pre-crisis peak in early 2008, 1.5% during the last 8 quarters, and just 1.8% during the last fourteen years—including the false prosperity of the Greenspan housing and credit bubble after 2001. So why will GDP growth accelerate by nearly one-third for a quarter century running—when even under CBO’s own forecast, labor force demographics will turn sharply negative in the years ahead?

Whereas 1.0-1.5% of annual real output growth during the second half of the 20th century was accounted for by labor force expansion, CBO projects this foundational component will drop to just a 0.5% annual rate during the next several decades. This demographically baked in reality, in turn, requires CBO to project that labor productivity will rise by 1.8% annually in order to meet its 2.3% output growth bogey.

But that just can’t happen. During the next 25 years the US economy will be shedding its most productive labor—which is to say, the now aging baby boom work force. At the same time, the US economy will also be laboring under a severe, cumulative deficit in domestic investment in productive plant and equipment—the sine quo non of future labor productivity growth. Since the turn of the century, in fact, real CapEx growth have averaged only 0.8% annually, or hardly one-third of its prior historical rate; and the true measure of future productivity growth— net investment in real plant and equipment after capital consumption allowances—has actually declined by 20% since 1999-2000.

Real Business Investment - Click to enlarge

Real Business Investment – Click to enlarge

In a word, the shortfall from CBO’s 4.3% nominal growth scenario is likely to come almost entirely out of the “real” component of GDP rather than its 2.0% GDP deflator assumption. This means that nominal Federal spending would likely remain consistent with CBO’s projections as outlined above (i.e. COLA adjustments would be about the same), and could possibly rise considerably higher due to a larger caseload of safety net beneficiaries.

The baleful bottom line is this. Under the CBO’s rosy scenario, the primary Federal deficit by 2039 is just under $1 trillion annually or a modest 1.8% of GDP, meaning that the primary deficit is not fueling an uncontrolled debt spiral. By contrast, under the 3.3% nominal GDP scenario with realistic assumptions about labor productivity and real growth, the primary deficit would soar to nearly $3 trillion annually, and reach 7.5% of GDP.

It goes without saying that a primary deficit that massive would fuel a hellacious debt spiral—the very opposite of the benign outlook espied by professor Krugman. Rather than the 106% of GDP already built into the CBO forecast, the public debt over the next 25 years would literally spiral off the charts.  We would end up exactly in the fiscal briar patch that professor Krugman so insouciantly mocks:

… because people will fear that we’re about to turn into Greece, Greece I tell you.

So talk about unjustified complacency with respect to the public debt spiral! The best outcome we can imagine per CBO’s rosy scenario case is a clearly dangerous level of public debt relative to GDP. But the probable path under sober economics is orders of magnitude worse.  Indeed, with primary debt accumulating at a nearly double digit rate against GDP, the CBO’s average 4.1% interest expense assumption would give way to higher rates, meaning that neither of professor Krugman’s two magic numbers cut it. Under a regime of even modest monetary normalization over the next quarter century, current fiscal policy will lead to interest rates that are far higher, not lower, than the growth rate of nominal income.

So its time to put Greece right back into the front and center of the US fiscal picture, I tell you!




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No Thanks, Call Me When You’re Dead

By: Chris Tell at: http://ift.tt/146186R

It’s no secret that Mark and I work with a lot of start-ups. In this capacity we align closely with various accelerators, incubators, venture capitalists, bankers and the attendant flotsam and jetsam in the early stage capital markets.

All of the above mentioned folks are typically focusing on working to finance, build and bring value to young companies. Not often talked about is what happens when things go wrong.

What can possibly go wrong?

Oh, lots can go wrong, trust me. The stats are hard to ignore: 75% of all start-ups will never make it out alive. Founders of these companies will work extremely hard, probably put all their net worth into their companies, sleep infrequently, mortgage the house, forgo time with family and friends, possibly get divorced and yet will still fail.

I can and do sympathize with this plight. As an investor closely guarding my capital, I cannot and will not however put money into a “sympathy” play. Many years ago I made the mistake. Not again. That can only ever end one way, and it is rarely good for either party. I can’t tell you how many times I’ve had founders say to me:

Oh but Chris, I’ve put all my money into this, I’ve worked my ass off and therefore my valuation/salary makes sense

Unfortunately that’s normally just not the case. As an entrepreneur you’re signing up for the “potential” to make a little or a lot of money but don’t expect it be easy. Unless you’re in social media with good PR skills in which case you should probably take the money and run but I digress.

Right now we have one particular company whose metrics are quite simply kicking ass, the founder and management are taking zero pay and have done so from the beginning. We believe they’re on the cusp of something big. Not because we want it to be so, but because the business is gaining a lot of traction, they have an awesome platform and yet with all of this they have struggled to raise capital. All the while we’ve watched absolute garbage companies raise funding at nosebleed valuations. Hey who said markets and investors were rational?

This has been one of their failings…not having someone on the board that can market, tell the story and raise capital on their behalf. Then we have another company in our portfolio run by a young, very smart, driven gent who lived on his grandmothers couch in order to self finance and bootstrap his dream. The company has recently secured half a dozen high profile clients and their revenues and business have exploded. Then we have another company which Mark and I invested in many years ago which is likely to be taken out back shortly and shot. Things don’t always work out.

The fact of the matter is this. As an entrepreneur, do you want early-stage high-risk capital? Fine, but it shouldn’t be cheap. The higher the risk the greater the return required. Whether it’s a convertible note on a company with no tangible assets or straight up equity as a founder, you’re going to have to give up more than an already profitable company would. Don’t be pissed off. It only makes sense.

It is pretty rare for Mark and I to meet with founders who are NOT confident in their ability to conquer the world. We’ve had some who even when countered with solid factual data which invalidates their business models, remain steadfast. Call it confidence, call it cockiness or call it arrogance, it doesn’t really matter, entrepreneurs tend to have this trait. Quite frankly it is probably required to succeed, though from an investors perspective this all to often needs to be countered with experience, and a healthy dose of “sanity check”. Yet another reason we focus so intently on management.

Unless you’re a start-up building an app that will clean your fingernails or perform some other life-changing function, in which case now is the right time to go get you some silly Silicon Valley money, you’re likely going to have to deal with investors like ourselves. That means your small company which you’re placing a $5 million pre-money valuation on is probably, being realistic, more likely to get funded via a convertible note with follow on financing being done at substantially less than that especially if you’ve failed to gain traction. And sometimes as is the case with the company I mentioned earlier on, it’s best to let them die.

Which leads me to…

Bottom feeders or Value hunters

There exist turnaround specialists or activist investors focused on corporate restructuring of larger yet unprofitable businesses. Sometimes unenthusiastically called “chop shops”, activist investors have made fortunes in taking unprofitable companies and selling off various parts whereby the value of the “parts” equal more than the whole.

Operating in a similar environment are turnaround specialists who focus in getting rid of wasteful practices, incompetent management teams and caustic investors that are destroying shareholder value.

Moving even further down the chain we get to those companies in liquidation. These are the companies which have done what so many start-ups do… fail. They’ve died of natural causes, or maybe they’ve been taken out back and proverbially “shot” by their VC or investor group. One can only hope that it was quick because it never is painless.

It was around this time last year Mark and I were pitched on a deal. It was an existing, relatively small business. The company was up for sale. The story was it was a consolidation and being divested from the core assets of the largest shareholder and owner. Digging deeper we believed otherwise and instead sat on the sidelines while a good friend and colleague kept a watchful eye on the proceedings.

About a month ago, together with our friend, we bought the company from the liquidators for less than 1/20 the original offering price. It actually made sense to buy it dead rather than alive, as we were really just after a few key assets.

The risk reward ratio has now dropped substantially. In some (not all) instances it’s actually far easier to paint on a fresh canvas than it is to take an existing, flawed painting and try redo it so that it’s perfect.

One of the most profitable strategies one can employ is buying during, or after a collapse. This is true of large stock markets, sectors and it’s equally true of individual public and private companies. It takes patience and a fair bit of guts, but the potential rewards if you get it right can be life-changing.

– Chris

 

I’ve got two quotes for you today. Both are from the recently departed Felix Dennis. I didn’t know much about Felix Dennis and was recently put onto some of his work by my friend Chris Mayer who writes the excellent Mayer’s Special Situations . I think they’re particularly apt for any investor to consider.

“I think having a great idea is vastly overrated. I know it sounds kind of crazy and counterintuitive. I don’t think it matters what the idea is, almost. You need great execution.” – Felix Dennis

“Good ideas are like Nike sports shoes. They may facilitate success for an athlete who possesses them, but on their own they are nothing but an overpriced pair of sneakers. Sports shoes don’t win races. Athletes do.” – Felix Dennis




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Actually Apple’s Net Cash Hasn’t Grown In Two Years

Perhaps the one chart that is most praised following every Apple’s quarterly earnings report is the one showing the company’s gargantuan cash trove, and sure enough, this quarter was no exception for good reason: AAPL’s total cash and equivalents, including its short and long-term investments just rose to a record $164.5 billion, as shown below.

There is one problem with this chart: it includes the contribution of AAPL’s debt, because while pundits are quick to praise AAPL’s cash, they forget that starting in Q3 2013 AAPL also started loading up on debt, first $17 billion, and as of this quarter, the debt has now grown to $29 billion.

Why? For the simple reason that the bulk of AAPL’s cash hoard has been held offshore since 2009, and only $18.4 billion, or the least since September 2010, was on the domestic books as of the March 31 quarter (the June 30 update won’t be available until the 10-Q is filed).

 

Clearly, AAPL doesn’t want to pay cash taxes on its repatriated cash, so for the past year it has been issuing debt instead to fund dividends and buybacks. Which also means that one has to net out the debt when looking at the firm’s net cash level.

It is this – Apple’s cash net of its debt – which is shown on the chart below. Contrary to the chart at the top, it shows that Apple’s cash has actually not increased at all in the past 7 quarters, and at June 30 was $135 billion, below the $137 billion AAPL had in December 2012 when it launched its aggressive “shareholder friendly” strategy in the form of massive dividends and stock buybacks.

The good news is that for now, courtesy of its massive cash cushion, any incremental debt is merely a blip, but what was $0 less than two years ago has promptly grown to $29 billion, a far faster pace of growth than AAPL’s own organice cash creation. At this rate, in a year or two, even S&P may start asking if AAPL’s AA+ rated debt is truly worth the same rating as the US itself.




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1 In 25 New Yorkers Is A Millionaire

New York “has the second largest millionaire and largest billionaire population of any global city,” according to analysis by Spear’s magazine, but as LA Times reports, walk down the streets of The Big Apple and 1 in every 25 New Yorkers you bump into is a millionaire. But if you really want to rub shoulders with the rich… almost 1 in 3 Monaco residents are millionaires) and likely billionaires too…

 

As LA Times reports,

The Big Apple ranks fourth in a listing of the top 20 global cities based on the portion of their populations whose net worth, excluding primary residence, tops $1 million.

 

Altogether, 4.63% of New Yorkers, or 389,100 people, are millionaires, according to the analysis by Spear’s magazine and consulting firm WealthInsight.

 

“New York has long been the bastion of wealth not only in America, but the world,” said Oliver Williams, an analyst at WealthInsight. “It has the second largest millionaire and largest billionaire population of any global city.”

 

Monaco, Zurich and Geneva claimed the first three spots. Nearly 3 in 10 people in Monaco are millionaires.

Via Spears,

TOP 20 GLOBAL CITIES BY MILLIONAIRE DENSITY – FULL BREAKDOWN:

1. Monaco (29.21%)

2. Zurich (27.34%)

3. Geneva (17.92%)

4. New York (4.63%)

5. Frankfurt (3.88%)

6. London (3.39%)

7. Oslo (2.90%)

8. Singapore (2.80%)

9. Amsterdam (2.63%)

10. Florence (2.59%)

11. Hong Kong (2.58%)

12. Rome (2.54%)

13. Dublin (2.40%)

14. Doha (2.31%)

15. Toronto (2.29%)

16. Venice (2.25%)

17. Brussels (2.11%)

18. Houston (2.09%)

19. San Francisco (2.07%)

20. Paris (2.04%)




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Meet Theranos, Inc. – The Blood Testing Company with Henry Kissinger and a Cadre of Military and Political “Elite” on its Board

Screen Shot 2014-07-22 at 4.46.32 PMKissinger deserves vigorous prosecution for war crimes, for crimes against humanity, and for offenses against common or customary or international law, including conspiracy to commit murder, kidnap, and torture.

A good liar must have a good memory: Kissinger is a stupendous liar with a remarkable memory.

– Christopher Hitchens in The Trial of Henry Kissinger

I first heard of Theranos, Inc. in the fall of 2013, when the Wall Street Journal published a piece titled, Elizabeth Holmes: The Breakthrough of Instant Diagnosis. However, it wasn’t just me. It was the first time pretty much anyone on earth had heard of the company, because despite having been founded a decade earlier in 2003, it maintained a level of secrecy more characteristic of classified military operations.

Here are some excerpts from that original article:

continue reading

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“Authenticity Is As Rare As A Unicorn In Today’s Politically-Motivated Markets”

Submitted by Ben Hunt via Salient Partners' Epsilon Theory blog,

 

[Jeremiah and Bear Claw hunt elk]

Jeremiah:

Wind’s right, but he’ll just run soon as we step out of these trees.

Bear Claw:

Trick to it. Walk out on this side of your horse.

Jeremiah:

What if he sees our feet?

Bear Claw:

Elk don’t know how many feet a horse has!

“Jeremiah Johnson” (1972)


Gaston Phoebus, “Livre de Chasse” (1387)

In war, truth is the first casualty.
Aeschylus (525 – 456 BC)

I honestly believe that people of my generation despise authenticity, mostly because they're all so envious of it.
Chuck Klosterman, “Killing Yourself to Live: 85% of a True Story” (2005)

I began my time as Chairman with the goal of increasing the transparency of the Federal Reserve, and of monetary policy in particular. In response to a financial crisis and a deep recession, the Fed’s monetary policy communications have proved far more important and have evolved in different ways than I would have envisioned eight years ago.
Ben Bernanke, “Communication and Monetary Policy” (Nov. 19, 2013)

The stalking horse is a hunting technique that goes back thousands of years, where a hunter finds it much easier to get a drop on wild game by hiding behind an animal or a representation of an animal that the prey finds more familiar in its natural environment than a human. My favorite description of how the stalking horse technique works comes from the 1972 Robert Redford movie, “Jeremiah Johnson”, where the old trapper Bear Claw patiently explains to newbie trapper Jeremiah that they can walk behind their horses to get a good shot because “elk don’t know how many feet a horse has”. Of course Bear Claw is right, and he and Jeremiah eat well that night.

Today’s markets are chock-full of stalking horses, not for something as trivial as setting up a hostile takeover (which is how the phrase has traditionally been used in investment circles), but for setting up politically-driven macro-economic goals. Whether it’s the use of words to create a representation of a stalking horse or a direct investment in a security to turn it into a stalking horse, governments today are more manipulative (and I mean that in the technical sense of the word) than at any time since the 1930’s. Very little is as it seems in modern markets.

And yes, we’re the elk.

Here’s a great example of what I mean. This past Wednesday the WSJ published an article titled “China Plays a Big Role as US Treasury Yields Fall”, pointing out that the Chinese government bought US Treasuries at the fastest pace in the first five months of 2014 than at any point since this data started being collected more than 30 years ago. China added $107 billion to its Treasury holdings over these five months, almost 10% of its total Treasury holdings of $1.27 trillion, which is itself about 10% of the total $12 trillion US Treasury market. As the article points out, these massive purchases go a long way towards explaining “the mysterious US bond rally of 2014”, where, for example, yields on the 10-year note fell from 3% at the end of 2013 to about 2.5% over this five month period, despite widespread expectations at the start of the year by both market savants and investor public opinion that rates were on a one-way path up, up, and away.

The reason I characterize China’s purchases as a stalking horse rests on both the meaning of the purchases for the Chinese government and the perception of the purchases by market participants.

China is not buying US Treasuries for the same reasons that, say, PIMCO buys US Treasuries. China is not an economic buyer of US Treasuries, making an asset allocation decision based on some evaluation of fundamental global growth prospects. No, China is a strategic buyer of US Treasuries, purchasing US dollar-denominated assets in order to weaken its own currency and spur domestic growth by boosting exports. I’ve written about this sea change in Chinese monetary policy a lot (here, here, and here), and what we are seeing in China’s acceleration of US Treasury purchases is part and parcel of this existential political calculus and its challenge to the Western “rules” of global economics.

What’s really interesting to me – and this gets to the market perception question – is that this “explanation” of the 2014 US bond rally is just now being promulgated by one of the major media arbiters of taste. I mean, China’s Treasury purchases are no secret. The data is published monthly with about a 6-week delay. In April (data released more than a month ago) China bought more Treasuries than the US Fed, but there was hardly a peep about it in any major financial media outlet. What’s interesting about the perception by market participants of China’s accelerated Treasury purchases is that there was essentially NO perception of these purchases as an explanation of falling rates. It’s as if China were invisible or something, which, of course, is EXACTLY how China wished to be perceived in these actions. The market’s inability to recognize that China was buying massive amounts of US Treasuries to weaken the yuan is exactly like the elk herd’s inability to recognize that Jeremiah Johnson was standing on the other side of his horse to get a cleaner shot. The market has access to all the data, just like the elk can see how many feet are under Jeremiah’s horse. We see six feet under the horse, but we can’t comprehend the meaning of six feet under a horse. This is the secret of the stalking horse.

To be clear, I’m NOT saying that there is some grand conspiracy between financial media and China to keep their actions and motives hush-hush. Even if, to use a purely hypothetical thought experiment, Rupert Murdoch were perfectly willing to carry Beijing’s water to the ends of the Earth, the simple truth is that the Chinese regime doesn’t need to resort to these Citizen Kane tactics to carry out a stalking horse operation.

Also to be clear, I’m NOT saying that China’s Treasury purchases are the only reason for falling rates or that there are no fundamental economic reasons for continued strength in global bond markets. On the contrary, I’m firmly in the camp that global growth is structurally challenged, miserable as far as the eye can see, and that Western monetary policy is part of the problem, not the solution.

What I’m saying is that in the Golden Age of the Central Banker it is impossible to distinguish fundamental economic reasons for asset class price movements from politically-driven strategic reasons. Are European sovereign bonds so strong over the past few months because growth remains pathetically weak or because Draghi is promising his own version of QE? Answer: yes.

What I’m saying is that:

  1. Just as the elk is hard-wired to trust a horse standing in a field no matter how many legs it has, so are we wired to watch stocks go up and down and think about fundamental economic explanations for market outcomes no matter how many signals exist that non-economic game-players are really calling the shots.
  2. Government actors, from the Fed to the ECB to the White House to the Chinese Politburo, understand how we are wired and strategically use that understanding to further political goals such as market stability (US) and trade regime change (China). They stand behind their horses – stocks and bonds and fundamental economic explanations – in order to hunt down their true quarry without spooking anyone.
     

Once you start thinking about what’s happening in markets and the world as an inextricable weave of fundamental events and political efforts to shape our interpretation of those events to achieve a political end, you start to see stalking horses everywhere. A Fed QE program ostensibly to reduce unemployment and help Main Street? Stalking horse. A regulatory Big Data program ostensibly to identify brokers who churn accounts? Stalking horse. A Chinese banking program ostensibly to liberalize currency exchange rates? Stalking horse.

And it’s not just actual programs or actual market behaviors like the Chinese purchase of US Treasuries. When words are used for strategic effect rather than a genuine transmission of information you create a virtual stalking horse. This, of course, describes every use of words by every politician and every central banker. This is what Bernanke and Yellen and Draghi and Abe and Obama and Merkel mean when they refer to communication policy. Communication policy is the strategic use of words to shape perceptions and expectations. It’s a focus on how something is said as opposed to what is described. It’s a focus on form rather than content, on truthiness rather than truth. It’s why authenticity is as rare as a unicorn in the public world today.

Look, I understand why politicians and bankers have completely abandoned authenticity, an uncommon quality even in the best of times. The Great Recession was a near-death experience for the global economy, and slamming a syringe of adrenaline into the patient’s heart – which was basically what QE 1 did – doesn’t happen without long-term side-effects. To switch the metaphor around a bit, this was a war to preserve the System, and as Aeschylus said 2,500 years ago, the first casualty of war is truth. I really don't think Bernanke or Draghi came into office thinking that their public statements would become the most powerful weapon in their arsenal, or that they could train markets to respond so positively to words presented strategically for effect, but there you have it. This is what worked. This is how the war was won.

So … I understand why politicians and bankers have adopted a stalking horse technique to shape market expectations and behaviors, but that doesn’t mean I have to like it. And while I am happy to condone the use of emergency powers to win a war and save the world, I am not at all comfortable with their continued use once the crisis is over. Unfortunately, I believe that is exactly what has happened, that “strategic communication policy” has mutated from an emergency measure designed to prevent an economic collapse into a standard bureaucratic process designed to maintain financial stability. Is this banal assumption and routinization of power a natural bureaucratic response to a crisis, something we also saw in the aftermath of the Great Depression? Yes, but I’ve got examples going the other way, too. Lincoln suspended habeas corpus in 1861, and good for him. But in early 1866 – less than a year after Lee’s surrender at Appomattox – the US government stood down and restored Constitutional protections. I am really hard-pressed to understand how the exigencies of recovery from the Great Recession, now more than 5 years on, are somehow more deserving of ongoing emergency policies than the immediate aftermath of the freakin’ Civil War.

Wait a second, Ben. Are you seriously equating the government’s use of “strategic communications” to a suspension of Constitutional protections?  Doesn’t that seem a tad over the top? Yes I am, and no I don’t think so. The bedrock assumption of limited, representative government is that we, the people have an inalienable right to make an informed decision about who will make policy decisions on our behalf. Of course this is an imperfect process, and of course the information we use to make these decisions will be mediated and skewed by all sorts of competing interests. But it makes a big difference if the government itself is fully committed to mediating and skewing this information. And it makes all the difference in the world if relatively apolitical institutions like the Fed and various regulatory authorities – institutions which have been granted a vast array of powers over the years precisely because they have been viewed as relatively apolitical – now embrace the highly political act of mediating and skewing information in service to their own particular visions of stability and status quo preservation. This is the danger of strategic communication policy. This is the price we pay for a loss of authenticity within our most important institutions.

Whew! Okay, I’ll climb down from the soap box for now. What is the practical investment adaptation to all this, where historical market patterns based on economic principles can and will be turned on their heads by government “hunters” determined to capture their non-economic goals? I believe that now, more than ever, a portfolio based on what I call profound agnosticism is in order. It’s not easy to admit that your crystal ball is broken, that you have no idea what will happen next or when it will happen, but that’s the required mind-set, I think. Importantly, however, this mind-set does not require hiding under a rock or going to cash or playing defense all the time. Is the Golden Age of the Central Banker a time for investment survivors rather than investment heroes? Absolutely. But as I’ll discuss in Epsilon Theory notes over the next few weeks, a wily elk can still do pretty well for himself if he recognizes the hunters’ games and sticks to the ground he knows. If you’re not already a subscriber, I hope you join the herd.

In closing, I thought I’d share one more illustration from the 14th century “Book of the Hunt”. Here we see a method of trapping wolves that involves a long circular corridor with a one-way door forming a concentric circle around a holding pen where the bait (a live sheep and a blood trail source) is placed. It’s important to use the concentric lay-out for three reasons. First, the circular outer wall is hard for the wolf to escape if he gets wise to the trap, and the circular inner wall keeps the live bait … alive. Second, wolves expect to hunt and track their prey. By establishing a longer trail that must be navigated successfully the wolf becomes more committed to the trap the farther he goes. Third and most importantly, the design prevents the wolves from seeing each other until they get to the end of the blood trail, at which point it’s too late to escape what they now know is a trap.


Gaston Phoebus, “Livre de Chasse” (1387)

In many respects this medieval wolf trap is an even more effective metaphor for modern markets and the Narrative constructions of politicians and bankers than the stalking horse. So for all you investors and allocators who see yourselves as solitary wolves rather than as an elk or some other herd animal, just remember that these hunters have a plan for you, too. You can learn a lot from an old book …




via Zero Hedge http://ift.tt/1lsiCB5 Tyler Durden