What is Raytheon up to?

Weirdest sponsored tweet I’ve seen.
Why advertise cruise missiles?

The only theory I have is that they’re trying to get public support for military spending in Europe. Somebody needs to get better at targeting their message if that’s the case though as I’m based in the US and in a liberal state (Oregon’s voted democrat for president since 1988.)

Middle East Impacts Beyond Crude

“The two IRGC battalions that moved to Iraq on Wednesday were shifted from the Iranian border provinces of Urumieh and Lorestan, the Iranian security officials said.”
WSJ: Iran Deploys Forces to Fight Al Qaeda Inspired Militants in Iraq

The crude market and broader energy markets are obviously impacted by any escalation of the Iraq/Syria/Iran/Kurd situation but have you thought about other impacts?  A few ideas, several would require sizable troop commitments the Obama administration has said won’t happen but TBD if that changes if (when?) ISIS or Iran occupies Baghdad.

Bullish: Tankers (TNP, FRO, TK)
Military operations in the region have tended to drive up both loading times and transit times more than they’ve reduced volumes; translates into increased demand for tankers from the global fleet.  Unfortunately, sustained maritime conflict like the Iran/Iraq “tanker war” can bring the risk of physical loss to the fore and increase the mutualization risk inherent in the mutual P&C insurance groups used by most of the publicly traded tanker companies.

Bearish: US Bonds (5YT & 10YT particularly)
Any flight to safety driven by the conflict or related volatility will be positive for treasuries of all maturities so don’t take my bearish comment here to be net.  Instead, I encourage you to moderate your enthusiasm for bond prices a bit as “boots on the ground” is likely to trigger calling up reserves and thereby tighten the labor market.  224k were called up for Operation Iraqi Freedom and 265k for the Gulf War, similar to the May’s non-farm payroll figure of 217k, and enough to effectively lower the unemployment rate by 14bp.  I figure that’s worth about a 1 month pull-in on the Fed’s tightening process from baseline.

Bearish: Advertising (IPG, OMC, CBS)
Wars are news sensations but viewership moves from higher CPM properties to the near zero CPM of commercial free 24 hour breaking news cycles.  Advertising agencies are particularly impacted as delayed campaigns don’t need to be refreshed.  Impact is likely to be minor for a drone campaign but a sustained air war or any escalation with Iran or Saudi Arabia would open downside scenarios.

Bearish: EUR/USD
I think just about any news is a reason to be bearish on the Euro at its current levels with a lack of unused monetary tools.  Middle East conflict=news ergo Euro downside.  I think short positions on periphery debt are a good way to play this theme with Greece being slightly more at risk due to its physical proximity to the region and issues it’s already having coping with Syrian migration/transit.

“New Normal” Eerily Familiar

Twitter’s IPO makes for great news not because it’s particularly important but because it’s new and in our 24/7 world that counts for more than I think it should.  Griping aside, I have to thank The Journal for finding a particularly insightful investment analyst to interview, Deborah Watkins.

Deborah doesn’t appear to have any training, experience, or track record in picking stocks but the reasoning behind her buy rating must have stricken a chord with many institutional investors: “I’m just buying because everybody’s talking about Twitter”

The article goes on to state that, “she’s not worried about price increases; she just wants to stick to her purchasing plan and buy the share immediately, though she hasn’t ruled out selling them quickly if there’s a sharp bump.”

Extraordinary Popular Delusions And The Madness Of Crowds

For those that don’t know how this kind of thinking ends, read Charles Mackay’s classic Extraordinary Popular Delusions and the Madness of Crowds.  The sections on the stock market only take up about a hundred pages but don’t limit yourself there as the other examples are more likely to surprise you.  Mackay says that we’re quick to blame others (government, business, those who offered the opportunity to us) even though we are the ones ultimately responsible for our own choices and the outcomes they generate.

Must Read: The Negotiator: My Life at the Heart of the Hostage Trade

The Negotiator

When the note says to not call the cops, call Ben Lopez.

Starting out as a psychologist, Ben fell into the roll of contract negotiator for families in crisis.  Brought in by ransom insurance companies (check your homeowner’s policy, you’re not covered) he managers the family, the negotiations, and ensures the trade goes smoothly.  He’s explicit: he takes it as a given that there will be an exchange of money for life; America may not negotiate with terrorists but he does, and doesn’t worry about the consequences.

Some lessons:

  1. Don’t call the cops, they’re more likely to kill you than the kidnappers
  2. If you’re going to be kidnapped, make sure it’s by Somali pirates.
  3. The person on the phone should not be a member of the family or an outside professional, get a trusted friend.
  4. Don’t agree to the first demand, negotiate it to around 10% of the initial ask.
  5. Get a commitment they won’t kidnap from the family again.

It’s not often I reread a book, this was an exception and his lessons translate directly to the business world.

  1. It’s better to ask forgiveness than permission so try and fail before you escalate.
  2. If you’re going to hate your job, make sure you get paid well.
  3. Delegate authority, especially when it’s important, it allows your representative to plead limited authority and ask for time if needed.
  4. Everything is negotiable
  5. People will follow personal commitments even if they’re not legally enforceable.

Danger + Money + Negotiation = Must Read


“In truth, the gold standard is already a barbarous relic.” -Keynes

Chris' Analysis of the Gold Standard

Importance of Empowering a Central Bank with Ability to Expand the Monetary Base


The Shipping Man

A bit of a shipping geek, I’ve enjoyed watching the ships call on the two bulk docks across from my new condo.  Most interesting was the Rosalia D’Amato, held by Somali pirates for ten months back in 2011, ending up with a $600k ransom payment and the crew’s safe return.  The Rosalia‘s ransom marked the end of escalating ransoms, with previous payments $6M+ and concern that $10M would become a new going rate.  Post Rosalia, ransoms have fallen and fewer incidents are occuring.

Chalk one up for the good guys.


Interested in piracy?

Wonder why rates are up 145% YoY but shippers are going bankrupt?

Looking for an easy read that’ll introduce you to the world of seaborne freight’s post-Lehman reality?

Check out The Shipping Man, a fictional account of a hedge fund manager’s decent into the difficult world of Greek scoundrels, conservative German bankers, and a Wall Street demand for high yield paper that know no bounds.  Targeted at those either interested in the industry, or looking to read about the misery of those trying to turn rusty buckets into money, it’ll remind you that the two best days of a boat owner’s life are the day they buy the boat, and the day they sell it.

Iran Ate My Data

Journal’s reporting Iran has been conducting cyber-attacks against US banks.  No data has been stolen or deleted to date though I expect end of the world types are already printing bank statements and hoarding cash.  Hacking’s not the real risk to our business data, we are.

Top 5 Real Data Threats

#1) Your Co-Workers’ Good Intentions
Keep your models on a SharePoint site so they’re available while you’re away?  Great idea until someone decides to delete it to reduce clutter.

#2) IT
Big companies have document retention policies calling for deletion of extraneous material while keeping important documents indefinitely.  Combine this with IT’s desire to reduce storage costs and you quickly find files older than 60 days disappearing servers no matter their importance.

#3) Shared Drives
Unlike SharePoint’s deletion risk, here the risk is obscurity.  The ease of moving large numbers of massive files to a centrally hosted shared drive leads people to put everything there, making it impracticable to find anything.

#4) Transitions
Was the pass down from your predecessor less than 6 months?  Something wasn’t covered and you’ll be calling them up asking for files.  What should you do if they’re leaving the company?  Make a copy of their hard drive.

#5) Yourself
You’re sure you saved that e-mail but can’t find it.  Look in the mirror, we are our own worst enemy.


Got a few e-mails asking for more info on US CDS.  I don’t know all the technical delivery complexities and so follow my own advice and don’t participate in that market but found Zero Hedge’s posting an interesting place to start: USA Credit Risk Now Worse Than 2011

Know the Details of Your Trade

1Y USA CDS hit 60bps last week, triggering a couple of segments on the 24 hour networks because they need to fill the airways with something but was otherwise ignored because 60bps=0.6% and that just isn’t much.  The simple (but wrong) math looks at CDS as a prop bet: default buyer wins, tails they lose.  This makes you think there’s a 1 in 167 chance of default.

However, CDS trade on an as-delivered basis.  This means that any eventual recovery on the bonds accrues to CDS seller after they buy them back at par.  What’s the expected recovery on defaulted treasuries?  Very likely close to their current trading price as solvency isn’t currently an issue.  Zero Hedge found the cheapest eligible bond trading at 84 and so the odds are actually 1 in 17.

The lesson here isn’t that the US will default (I put the odds at 1:4), or that it would be disaster if it did so temporarily (I put risk of SPX-20% given default at 1:3), it’s that you need to know the details of your trade before you make it.

There Be Dragons in the Tails

TBD: There Be Dragons

Do you know what happens to your exchange listed options contract in the event of a power outage in New York City?  I bet your counter party does!

Have you considered historical precedents for contract abrogation in the event of a crisis?  What if payment is simply delayed, who pays for legal fees and interest?  What rates apply for each?

What happens to your short position if the fraud company has its trading halted due to an SEC investigation?  Do you still have to pay short fees on the position even though you can’t close it?  What rate do you pay?  What is the loan basis, previous price or some other value?

These are clearly tail risks, but the tail is there whether or not we acknowledge it.

Cost of Politics

Much has been made of the S&P 500′s performance differential under Republican and Democratic administrations but the results fail to convince me that any election is a short term driver of the market.  Republican administrations have lower market performance over their term, but the market prices in their policies but running up during the campaign.  Even the in-office differential is skewed by a couple of disastrous periods that the sitting presidents certainly didn’t want to happen (FDR closed the nation’s bank on his first day, after Hoover’s record was hit by much of the Depression’s collapse.)

Instead of giving the credit/blame to one man, a better analysis would look at the Washington political/power/ego machine as a whole, and congress in particular.  To that end, I’d like to thank Chris for finding this chart of market performance.


In Case It's not Obvious: Congress Isn't Value Add

In Case It’s not Obvious: Congress Isn’t Value Add


Stock Market Returns Since 1953 Based on Administration