Wednesday, 14 June 2017

Stocks: Too Clever By Half.

Baltic Dry Index. 870 unch.     Brent Crude 48.28

Markets can remain irrational longer than you can remain solvent.

J. M. Keynes.

This morning we open with yet more warnings on the dangers in US stocks. Are US stocks high, but going higher, or Mount Everest high and ready to crash? No one knows of course, since JP Morgan estimates that human traders now account for only 10 percent of the volume. “Passive and quantitative investing accounts for about 60 percent, more than double its share a decade ago.” In other words, only the computer programmer knows, and since all the quants and passive ETFs all trade as a herd, they all buy together, until they all sell together, completely swamping the 10 percent of human investors.

To this old dinosaur market watcher, following the markets since 1968, I’ve never seen a time of more political uncertainty, nor more warnings from high profile money managers. A nod may be as good as a wink to a blind man, but both are good to those with eyes to see. Remaining in over priced stocks based on program traders needing greater fool buyers, is an investors 21st century version of Russian roulette. The trend is your friend, until one day it’s no longer the trend.

Below, when it all goes wrong this summer, speculators can’t say they weren’t warned.

The stock market is never obvious. It is designed to fool most of the people, most of the time.

Jesse Livermore.

Death of the human investor: Just 10% of trading is regular stock picking, JPMorgan estimates

Evelyn Cheng  CNBC
Quantitative investing based on computer formulas and trading by machines directly are leaving the traditional stock picker in the dust and now dominating the equity markets, according to a new report from JPMorgan.
"While fundamental narratives explaining the price action abound, the majority of equity investors today don't buy or sell stocks based on stock specific fundamentals," Marko Kolanovic, global head of quantitative and derivatives research at JPMorgan said in a Tuesday note to clients.

Kolanovic estimates "fundamental discretionary traders" account for only about 10 percent of trading volume in stocks. Passive and quantitative investing accounts for about 60 percent, more than double its share a decade ago, he said.

In fact, Kolanovic's analysis attributes the sudden drop in big technology stocks between Friday and Monday to changing strategies by the quants, or the traders using computer algorithms.

In the weeks heading into May 17, Kolanovic said funds bought bonds and bond proxies, sending low volatility stocks and large growth stocks higher. Value, high beta and smaller stocks began falling in a rotation labeled "an unwind of the 'Trump reflation' trade," Kolanovic said.

"Upward pressure on Low Vol and Growth, and downward pressure on Value and High Vol peaked in the first days of June (monthly rebalances), and then quickly snapped back, pulling down FANG stocks" — Facebook,, Netflix and Google parent Alphabet, the report said.

Along with Apple, the big tech-related names fell more than 3 percent each last Friday and dropped again Monday, sending the Nasdaq composite lower in its worst two-day decline since December.

However, "the contribution coming from quant rebalances to this snapback is now likely over," Kolanovic said, noting that S&P derivatives have supported market gains at the beginning of this week.

"$1.3T of S&P 500 options expire on Friday, and this will change dealers' positioning," he said. "This can result in a modest increase of market volatility starting on Friday and into next week."

There are only two other times in history when stocks were more expensive than today

Published: June 13, 2017 11:21 a.m. ET
By VitaliyN. Katsenelson
We are having a hard time finding high-quality companies at attractive valuations.

For us, this is not an academic frustration. We are constantly looking for new stocks by running stock screens, endlessly reading (blogs, research, magazines, newspapers), looking at holdings of investors we respect, talking to our large network of professional investors, attending conferences, scouring for ideas published on value-investor networks, and finally, looking with frustration at our large (and growing) watch list of companies we’d like to buy at a significant margin of safety. The median stock on our watch list has to decline by about 35%-40% to be an attractive buy.

But maybe we’re too subjective. Instead of just asking you to take our word for it, we’ll show you a few charts that not only demonstrate our point, but also show the magnitude of the stock market’s overvaluation and, more importantly, put it into historical context.

Each chart examines stock market valuation from a slightly differently perspective, but each arrives at the same conclusion: The average stock is overvalued somewhere between tremendously and enormously. If you don’t know whether “enormously” is greater than “tremendously” or vice versa, don’t worry, we don’t know either. But this is our point exactly: When an asset class is significantly overvalued and continues to get overvalued, quantifying its overvaluation brings little value.

Great Depression, dot-com bubble

Let’s demonstrate this point by looking at a few charts.

The first chart shows price-to-earnings of the S&P 500 SPX, +0.45%  in relation to its historical average. The average stock today is trading at 73% above its historical average valuation. There are only two other times in history that stocks were more expensive than they are today: just before the Great Depression hit and in the 1999 run-up to the dot-com bubble’s bursting.

We know what happened in both cases: Stocks declined — a lot. Based on over a century of history, we are fairly sure that, this time too, stock valuations will at some point revert to their mean and stock markets will decline. After all, price-to-earnings behaves like a pendulum that swings around the mean, and today that pendulum has swung far above the mean.

What we don’t know is how this journey will look in the interim. Before the inevitable decline, will price-to-earnings revisit the pre-Great Depression level of 95% above average, or will it maybe say hello to the pre-dot-com crash level of 164% above average? Or will another injection of QE steroids from central banks send stocks valuations to new, never-before-seen highs? Nobody knows.

One chart is not enough. Let’s take a look at another one, called the Buffett Indicator. Apparently, Warren Buffett likes to use it to take the temperature of market valuations. Think of this chart as a price-to-sales ratio for the whole economy, that is, the market value of all equities divided by gross domestic product (GDP). The higher the price-to-sales ratio, the more expensive stocks are.

In other news, the other shoe is about to visit Volkswagen. If it cost VW $25 billion to settle with America over 500,000 dirty, cheating, killer diesels, how much more will it cost VW to settle Europe wide claims, where the dirty, killer diesels, held far greater market share?

Tue Jun 13, 2017 | 2:45pm BST

Dutch, English drivers team up to sue VW over 'dieselgate'

Around 220,000 car drivers in the Netherlands, England and Wales joined forces on Tuesday in what could become a pan-European lawsuit against German carmaker Volkswagen (VOWG_p.DE) seeking compensation over its "dieselgate" emissions scandal.

UK law firm Harcus Sinclair and Dutch Foundation "Stichting Volkswagen Car Claim", a U.S.-style class action on behalf of an estimated 180,000 Dutch VW car owners, have teamed up in a move that could spark a wave of coordinated litigation across Europe.

VW, Europe's biggest carmaker, has said about 11 million cars worldwide were fitted with software to cheat diesel emissions tests that are designed to limit car fumes blamed for respiratory diseases and global pollution.

The company has already agreed to spend up to $25 billion in the United States to address claims from owners, environmental regulators, states and dealers and has offered to buy back about 500,000 polluting U.S. vehicles.

But it has not reached a similar deal in Europe and faces billions of euros in claims from customers and investors.

The carmaker has offered European drivers a software update for all affected vehicles, but lawyers say this does not resolve the problem and they are demanding adequate compensation.

The Dutch Foundation, which says it has been trying to reach a "reasonable settlement" with VW since 2015, said it was also "cooperating" with partners representing drivers in Austria, Germany, Switzerland and was in talks with others in Spain, France, Italy, Poland, the Czech Republic and Scandinavia.

"We are delighted to be teaming up with Harcus Sinclair UK Limited, who have done an excellent job in paving the way for car owners to seek redress from VW through the courts," said Guido van Woerkom, director of the foundation.

The expanding lawsuit is seeking compensation for damage suffered by VW, Audi, SEAT, Skoda and/or Porsche car owners, alleging VW and supplier Bosch were responsible for the sale of cars that breached toxic nitrogen oxides emissions rules.

In oil market news, if you can’t beat them join them, says Wood Mackenzie.

Oil majors embracing push to green energy: Wood Mackenzie

Geoffrey Morgan Monday, Jun. 12, 2017
CALGARY — Major oil and gas producers will put more of their capital into wind and solar developments as returns from renewables are poised to exceed some hydrocarbon projects, according to a report from Wood Mackenzie.

The report released Monday predicts multi-national energy companies could spend billions on renewable projects between now and 2035, as “the all-in returns for wind and solar stack up against” higher-cost oil and gas plays, exploration projects and acquisitions.

Wood Mackenzie analysts note that some North American onshore oil projects can generate a 22 per cent rate of return at US$65 per barrel oil prices, they also show that full-cycle exploration and marginal plays earn an average 10 per cent rate of return.

As a result, the returns from onshore and offshore wind power projects and solar projects compare favourably and could compete for US$90 billion in capital, earmarked by the majors in those higher cost oil and gas plays.

“There has been a convergence of the returns because the cost of renewables has been coming down, pushing their returns up,” said Wood Mackenzie director, corporate research Valentina Kretzschmar.

She added that a decline in the price of oil has hurt the returns from upstream projects. West Texas Intermediate oil prices were up slightly in Monday trading to US$46.07 per barrel.

However, even if the price of oil rises, Kretzschmar said demand forecasts for both oil and renewables illustrate the need for energy majors to allocate their capital toward wind and solar.

“They can’t afford to ignore it, they can’t afford not to be there and gain the experience,” she said, noting that renewables demand is growing.

While renewables will increasingly compete against oil and gas for capital, the International Energy Agency’s most recent outlook predicts the global demand for oil will continue to rise until 2040.

The Wood Mackenzie report indicated that while European oil majors would be among the first to transition spending away from higher cost oil and gas projects toward renewables, many Canadian companies have also allocated capital for wind projects.

I learned early that there is nothing new in Wall Street. There can’t be because speculation is as old as the hills. Whatever happens in the stock market today has happened before and will happen again. I’ve never forgotten that.

Jesse Livermore.

But can computers learn? And even if they can, what if they get hacked?

Crooks and Scoundrels Corner

The bent, the seriously bent, and the totally doubled over.
Two great hacks today, presented without need for comment. One day we all wake up dead.

'Crash Override': The Malware That Took Down a Power Grid

At midnight, a week before last Christmas, hackers struck an electric transmission station north of the city of Kiev, blacking out a portion of the Ukrainian capital equivalent to a fifth of its total power capacity. The outage lasted about an hour—hardly a catastrophe. But now cybersecurity researchers have found disturbing evidence that the blackout may have only been a dry run. The hackers appear to have been testing the most evolved specimen of grid-sabotaging malware ever observed in the wild.

Cybersecurity firms ESET and Dragos Inc. plan today to release detailed analyses of a piece of malware used to attack the Ukrainian electric utility Ukrenergo seven months ago, what they say represents a dangerous advancement in critical infrastructure hacking. The researchers describe that malware, which they’ve alternately named “Industroyer” or “Crash Override,” as only the second-ever known case of malicious code purpose-built to disrupt physical systems. The first, Stuxnet, was used by the US and Israel to destroy centrifuges in an Iranian nuclear enrichment facility in 2009.

The researchers say this new malware can automate mass power outages, like the one in Ukraine’s capital, and includes swappable, plug-in components that could allow it to be adapted to different electric utilities, easily reused, or even launched simultaneously across multiple targets. They argue that those features suggest Crash Override could inflict outages far more widespread and longer lasting than the Kiev blackout.

“The potential impact here is huge,” says ESET security researcher Robert Lipovsky. “If this is not a wakeup call, I don’t know what could be.”

The adaptability of the malware means that the tool poses a threat not just to the critical infrastructure of Ukraine, researchers say, but to other power grids around the world, including America's. “This is extremely alarming for the fact that nothing about it is unique to Ukraine,” says Robert M. Lee, the founder of the security firm Dragos and a former intelligence analyst focused on critical infrastructure security for a three-letter agency he declines to name. “They’ve built a platform to be able to do future attacks.”


Last December's outage was the second time in as many years that hackers who are widely believed—but not proven—to be Russian have taken down elements of Ukraine's power grid. Together, the two attacks comprise the only confirmed cases of hacker-caused blackouts in history. But while the first of those attacks has received more public attention than the one that followed, the new findings about the malware used in that latter attack show it was far more than a mere rerun.

Instead of gaining access to the Ukrainian utilities’ networks and manually switching off power to electrical substations, as hackers did in 2015, the 2016 attack was fully automated, the ESET and Dragos researchers say. It was programmed to include the ability to “speak” directly to grid equipment, sending commands in the obscure protocols those controls use to switch the flow of power on and off. That means Crash Override could perform blackout attacks more quickly, with far less preparation, and with far fewer humans managing it, says Dragos’ Rob Lee.

“It’s far more scalable,” Lee says. He contrasts the Crash Override operation to the 2015 Ukraine attack, which he estimates required more than 20 people to attack three regional energy companies. “Now those 20 people could target ten or fifteen sites or even more, depending on time.”

The Ether Thief

June 13, 2017.
A great read.
“October: This is one of the peculiarly dangerous months to speculate in stocks. The others are July, January, September, April, November, May, March, June, December, August and February.”
Mark Twain.
Technology Update.
With events happening fast in the development of solar power and graphene, I’ve added this section. Updates as they get reported. Is converting sunlight to usable cheap AC or DC energy mankind’s future from the 21st century onwards? DC? A quantum computer next?

New form of carbon that's hard as a rock, yet elastic, like rubber

Date: June 9, 2017

Source: Carnegie Institution for Science

Summary: Carbon is an element of seemingly infinite possibilities. This is because the configuration of its electrons allows for numerous self-bonding combinations that give rise to a range of materials with varying properties. A team of scientists has developed a form of ultra strong, lightweight carbon that is also elastic and electrically conductive. A material with such a unique combination of properties could serve a wide variety of applications from aerospace engineering to military armor.

A team including several Carnegie scientists has developed a form of ultrastrong, lightweight carbon that is also elastic and electrically conductive. A material with such a unique combination of properties could serve a wide variety of applications from aerospace engineering to military armor.

Carbon is an element of seemingly infinite possibilities. This is because the configuration of its electrons allows for numerous self-bonding combinations that give rise to a range of materials with varying properties. For example, transparent, superhard diamonds, and opaque graphite, which is used for both pencils and industrial lubricant, are comprised solely of carbon.

In this international collaboration between Yanshan University and Carnegie -- which included Carnegie's Zhisheng Zhao, Timothy Strobel, Yoshio Kono, Jinfu Shu, Ho-kwang "Dave" Mao, Yingwei Fei, and Guoyin Shen -- scientists pressurized and heated a structurally disordered form of carbon called glassy carbon. The glassy carbon starting material was brought to about 250,000 times normal atmospheric pressure and heated to approximately 1,800 degrees Fahrenheit to create the new strong and elastic carbon. Their findings are published by Science Advances.

Scientists had previously tried subjecting glassy carbon to high pressures at both room temperature (referred to as cold compression) and extremely high temperatures. But the so-called cold-synthesized material could not maintain its structure when brought back to ambient pressure, and under the extremely hot conditions, nanocrystalline diamonds were formed.

The newly created carbon is comprised of both graphite-like and diamond-like bonding motifs, which gives rise to the unique combination of properties. Under the high-pressure synthesis conditions, disordered layers within the glassy carbon buckle, merge, and connect in various ways. This process creates an overall structure that lacks a long-range spatial order, but has a short-range spatial organization on the nanometer scale.

"Light materials with high strength and robust elasticity like this are very desirable for applications where weight savings are of the utmost importance, even more than material cost," explained Zhisheng Zhao a former Carnegie fellow, who is now a Yanshan University professor. "What's more, we believe that this synthesis method could be honed to create other extraordinary forms of carbon and entirely different classes of materials."

The monthly Coppock Indicators finished May

DJIA: 21,009 +157 Up. NASDAQ:  6,199 +219 Up. SP500: 2,412 +161 Up.

1 comment: