Scott Adams, the cartoonist who created Dilbert, likes to say that there are only nine news stories, constantly re-written.
Every once in awhile I like to check the newspaper with his list in mind, to see if he is right. I'll start with his wording unmodified by examples.
1. EXTREME WEATHER BATTERS SOMEPLACE
2. IDIOTS KILL INNOCENT PEOPLE
3. POLITICIAN DOES SOMETHING ILLEGAL
4. PRIMATE ATTEMPTS INAPPROPRIATE SEX
5. EXPERTS WARN OF FINANCIAL CALAMITY
6. BIG COMPANY BUYS ANOTHER BIG COMPANY
7. FAMOUS PERSON DOES SOMETHING INTERESTING
8. A SCIENTIFIC DISCOVERY MIGHT BE USEFUL IN TEN YEARS
9. GOVERNMENT FAILS TO ACHIEVE A GOAL
Does that break-down hold up for the news of the past week or so?
1. The extreme weather story. One word: Australia.
2. Idiots kill innocent people. Always too easy. I won't even include a link. Check your local paper this morning.
3. Politician does something illegal. For this one, I've got a cool link, and it brings us in imagination to sunny Italy!
4. Primate attempts inappropriate sex. A porn-film operation under the primatological name "Cheeky Monkey Inc." seems to have made inappropriate use of a food vending truck.
5. Experts warn of financial calamity. And the municipal bond market is the target of many of the latest warnings.
6. Big Company Buys Another Big Company. These mergers often take on a trans-national cast. That's nothing new. But when the industry that is consolidating is defense consulting, it's still news.
7. Famous Person Does Something Interesting. Ah, the celebrity news category! Ricky Gervais seems to have touched a few Hollywood nerves.
8. The scientific discovery that might be useful in ten years? That CERN thing -- wasn't it supposed to have found that all-important Higgs boson by now? How long will it remain elusive before particle physicists wonder (a) whether it exists and (b) if it doesn't, how to patch up their theories?
9. Government fails to achieve a goal. The governments of Europe have experimented in recent years with the creation of a unified currency zone. That experiment may be crashing to an end. Symptoms of the crash are in all the papers.
Yes, I think Scott Adams has a point.
30 January 2011
29 January 2011
A Great Sentence from Dylan Thomas
"I was born in a large Welsh industrial town at the beginning of the Great War: an ugly, lovely town (or so it was, and is, to me), crawling, sprawling, slummed, unplanned, jerry-villa'd, and smug-suburbed by the side of a long and splendid-curving shore where truant boys and sandfield boys and old anonymous men, in the tatters and hangovers of a hundred charity suits, beachcombed, idled, and paddled, watched the dock-bound boats, threw stones into the sea for the barking, outcast dogs, and, on Saturday summer afternoons, listened to the militant music of salvation and hell-fire preached from a soap-box."
28 January 2011
Contango: 2011 Edition
Regular readers may remember that every year at this time I do some basic arithmetic regarding contango.
As a refresher, contango is the discount you can get on a non-perishable commodity by virtue of your willingness to accept delivery at once, or (stated inversely) the extra payment you make if you want the seller to hold it for you for some interim.
One would naturally expect this discount to be closely related to the costs of storage space. After all, if I buy crude today and tell you to deliver it six months from now, you have to keep it somewhere during the interval, and pay the maintenance on the storage facilities. If I take delivery now but I don't use it over the six months, then the cost of storage falls on me.
So: a year ago I simply measured the per-barrel price for March delivery (which was $74.14) against that for August delivery ($77.08) and extrapolated that into an annual rate. The five month delay in delivery cost the buyer $2.94 at that time, which extrapolated into an annual figure would have been $7.06 or about 9.5% of the price of the barrel.
Checking the figures a year later ... the price of a barrel was $89.58 for March 2011 delivery last time I checked. Never mind the question of why that has gone up. I'm focusing on just one piece of the puzzle now. The price for August delivery was $94.49. That's a difference of $4.91 for storage. This annualizes to $11.82, which is roughly 12.5% the price of a barrel.
Why is contango on the increase? I might like to suggest that this confirms that the market is signalling a recovery soon. People are willing to pay to store the crude NOT because the costs of carry have gone up dramatically but because speculators would rather have crude oil several months from now than now. And they'd rather have in six months from now because they are getting signals that people are going to be driving more, the wheels of industry are going to be turning ... good times will be back. At least to some degree.
But then ... I'm still uncomfortable. After all, forgetting speculation, the simple cost-of-carry sort of contango might have increased to 38% annually. Why not? Maybe all the easy storage spaces are all used up, and it takes extra expense to bring new storage space on line (marginalism, anyone?) and THAT is leading to a sizeable discount for anyone who will take the stuff out of the marketers' hands quickly.
All this is making my head hurt. Enough!
As a refresher, contango is the discount you can get on a non-perishable commodity by virtue of your willingness to accept delivery at once, or (stated inversely) the extra payment you make if you want the seller to hold it for you for some interim.
One would naturally expect this discount to be closely related to the costs of storage space. After all, if I buy crude today and tell you to deliver it six months from now, you have to keep it somewhere during the interval, and pay the maintenance on the storage facilities. If I take delivery now but I don't use it over the six months, then the cost of storage falls on me.
So: a year ago I simply measured the per-barrel price for March delivery (which was $74.14) against that for August delivery ($77.08) and extrapolated that into an annual rate. The five month delay in delivery cost the buyer $2.94 at that time, which extrapolated into an annual figure would have been $7.06 or about 9.5% of the price of the barrel.
Checking the figures a year later ... the price of a barrel was $89.58 for March 2011 delivery last time I checked. Never mind the question of why that has gone up. I'm focusing on just one piece of the puzzle now. The price for August delivery was $94.49. That's a difference of $4.91 for storage. This annualizes to $11.82, which is roughly 12.5% the price of a barrel.
Why is contango on the increase? I might like to suggest that this confirms that the market is signalling a recovery soon. People are willing to pay to store the crude NOT because the costs of carry have gone up dramatically but because speculators would rather have crude oil several months from now than now. And they'd rather have in six months from now because they are getting signals that people are going to be driving more, the wheels of industry are going to be turning ... good times will be back. At least to some degree.
But then ... I'm still uncomfortable. After all, forgetting speculation, the simple cost-of-carry sort of contango might have increased to 38% annually. Why not? Maybe all the easy storage spaces are all used up, and it takes extra expense to bring new storage space on line (marginalism, anyone?) and THAT is leading to a sizeable discount for anyone who will take the stuff out of the marketers' hands quickly.
All this is making my head hurt. Enough!
27 January 2011
Equity and Prop Desks
Below is a brief passage from what may become the third chapter of my proposed book as represented in the table of contents I provided on December 10, 2010.
This complements materials I've provided for the two previous chapters, and we will continue our march in a measured pace.
--------------
3. Equity and Prop Desks
The distinction between equity and debt is critical to any serious discussion of modern finance. It is also, not coincidentally, critical to the understanding of corporate liquidations or reorganizations. We will begin there, and soon enough we’ll be discussing corporate governance, government regulation, and the mysteries of federalism.
Think of a newly bankrupt corporation as a see-saw with a much heavier weight on the left and a lighter weight on the right. The right end, then, is up in the air. The left end (the equity) sits on the ground. The fulcrum is in the middle.
In terms of the right to receive a payoff, the most senior debt has first dibs. This is the airiest part of the see-saw. After those debts are paid off, payments follow in a sequence defined by contract and law. In time, the liquidators of the estate come to the fulcrum – the point at which what remains to be distributed is the good will of the ongoing enterprise.
Let’s assume that there is some such value (if not, we’d be dealing with a liquidation rather than a reorganization). On this assumption, the holders of the “fulcrum security” will be reimbursed by the transformation of their securities into the equity of the reorganized company. The classes of security that are lower than the fulcrum security, including the holders of the old equity, will get nothing.
One quick way of expressing all of this is to say that the holders of the equity of a company are the ones who bear the “residual risk.” They are the ones most certain to lose out in the event of liquidation. Thus, their interests are aligned with the interests of the corporation as a continuing, sustainable, entity.
To use a serious maritime image rather than the frivolous playground imagery above, we might say this: it is because the captain would go down with the ship, in accord with maritime tradition, that the captain is the best one to entrust with the task of steering the ship safely. Passengers with secure access to a rowboat in the event of a mishap are less suitable for the task.
--------
A footnote in there may refer to “Chapter 11 Reorganization Cases and the Delaware Myth” by Harvey R. Miller (2002), an article that sought to rebut the widespread impression, the “myth” that “there is something fundamentally wrong, even reckless, with the reorganization process as it is practiced” in the federal bankruptcy court in bellwether Delaware.
A further theme of the chapter as it develops will be the critical role of speculation in uncovering the real value of assets. Specifically, the equity markets (and their speculators) reveal the value of an ongoing enterprise as its market cap. The difficulties caused by regulations that obscure that process, thus hiding the true value. Prices as data. Leonard Read’s pencil.
From there to the role of shorts, a return to the Enron scandal, what Skilling called a certain short. Hedge funds and the prop desks of banks.
This complements materials I've provided for the two previous chapters, and we will continue our march in a measured pace.
--------------
3. Equity and Prop Desks
The distinction between equity and debt is critical to any serious discussion of modern finance. It is also, not coincidentally, critical to the understanding of corporate liquidations or reorganizations. We will begin there, and soon enough we’ll be discussing corporate governance, government regulation, and the mysteries of federalism.
Think of a newly bankrupt corporation as a see-saw with a much heavier weight on the left and a lighter weight on the right. The right end, then, is up in the air. The left end (the equity) sits on the ground. The fulcrum is in the middle.
In terms of the right to receive a payoff, the most senior debt has first dibs. This is the airiest part of the see-saw. After those debts are paid off, payments follow in a sequence defined by contract and law. In time, the liquidators of the estate come to the fulcrum – the point at which what remains to be distributed is the good will of the ongoing enterprise.
Let’s assume that there is some such value (if not, we’d be dealing with a liquidation rather than a reorganization). On this assumption, the holders of the “fulcrum security” will be reimbursed by the transformation of their securities into the equity of the reorganized company. The classes of security that are lower than the fulcrum security, including the holders of the old equity, will get nothing.
One quick way of expressing all of this is to say that the holders of the equity of a company are the ones who bear the “residual risk.” They are the ones most certain to lose out in the event of liquidation. Thus, their interests are aligned with the interests of the corporation as a continuing, sustainable, entity.
To use a serious maritime image rather than the frivolous playground imagery above, we might say this: it is because the captain would go down with the ship, in accord with maritime tradition, that the captain is the best one to entrust with the task of steering the ship safely. Passengers with secure access to a rowboat in the event of a mishap are less suitable for the task.
--------
A footnote in there may refer to “Chapter 11 Reorganization Cases and the Delaware Myth” by Harvey R. Miller (2002), an article that sought to rebut the widespread impression, the “myth” that “there is something fundamentally wrong, even reckless, with the reorganization process as it is practiced” in the federal bankruptcy court in bellwether Delaware.
A further theme of the chapter as it develops will be the critical role of speculation in uncovering the real value of assets. Specifically, the equity markets (and their speculators) reveal the value of an ongoing enterprise as its market cap. The difficulties caused by regulations that obscure that process, thus hiding the true value. Prices as data. Leonard Read’s pencil.
From there to the role of shorts, a return to the Enron scandal, what Skilling called a certain short. Hedge funds and the prop desks of banks.
23 January 2011
The One Before Eichmann
Adolf Eichmann is in the news again. Der Spiegel says that newly available records give a new story of his life in hiding, and tell of an Israeli effort to capture him when Israel itself was a brand spankin' new nation, in 1949.
http://www.jpost.com/JewishWorld/JewishNews/Article.aspx?id=203881
(My apologies -- I've had trouble getting that URL to work as a link -- just copy and paste it into your browser if you like!)
Some related surfing tells me that before the Eichmann case, Israel had only tried one WW II war criminal. That was Rezso Kasztner, a Hungarian Jew who, Israel alleged, had collaborated with Eichmann in the destruction of the Jews of that country.
According to Neal Bascomb, author of "Hunting Eichmann" (2009), Israel didn't even have a law on the subject of prosecutinbg Nazis and their collaborators until 1950, so they wouldn't have had one in place at the time of that first effort to capture Eichmann.
As to Kasztner, Bascomb writes: "The supreme court ... eventually ruled that Kasztner had saved Jewish lives rather than aided in their destruction -- but not until after he had been assassinated in March 1957."
Tough timing on that vindication, Kasztner ol' buddy.
http://www.jpost.com/JewishWorld/JewishNews/Article.aspx?id=203881
(My apologies -- I've had trouble getting that URL to work as a link -- just copy and paste it into your browser if you like!)
Some related surfing tells me that before the Eichmann case, Israel had only tried one WW II war criminal. That was Rezso Kasztner, a Hungarian Jew who, Israel alleged, had collaborated with Eichmann in the destruction of the Jews of that country.
According to Neal Bascomb, author of "Hunting Eichmann" (2009), Israel didn't even have a law on the subject of prosecutinbg Nazis and their collaborators until 1950, so they wouldn't have had one in place at the time of that first effort to capture Eichmann.
As to Kasztner, Bascomb writes: "The supreme court ... eventually ruled that Kasztner had saved Jewish lives rather than aided in their destruction -- but not until after he had been assassinated in March 1957."
Tough timing on that vindication, Kasztner ol' buddy.
22 January 2011
Prometheus, Continued
I'll continue my discussion from yesterday without a lot of overlap.
It seems that the Federal Circuit, via its decision in Prometheus Labs, is suggesting that the doctrinal limit on the patenting of "physical phenomena" doesn't actually limit very much.
The above link will take you to Holman's Biotech IP Blog, which has a very extensive discussion of this case. Unfortunately Holman, like many of the blogosphere's commentators on IP matters, is a patent hawk. He believes the stronger is the legal protection for patent hoilders, the better. I, on the other hand, am a dogged patent dove, or maybe a dovish patent dog (allegorical zoos become confusing): so on my anarcho-cap bias alone I would have been happy to see this case go the other way.
It still might, because SCOTUS could yet get it. The Bilski decision indicates they want to do something about this field of law, and they obviously didn't think that decision was a proper vehicle for doing anything bold. Maybe this one will be more to their liking.
As to the "physical phenomena" limit in particular, I'll note that back in 1948 the court said that the characteristics of certain bacteria, "like the heat of the sun, or electricity, or the qualities of metals, are part of the storehouse of knowledge of all men. They are manifestations of the laws of nature, free to all men and reserved exclusively to none." Here's a link to that decision, by William O. Douglas.
Love that oracular Douglasite prose.
It seems that the Federal Circuit, via its decision in Prometheus Labs, is suggesting that the doctrinal limit on the patenting of "physical phenomena" doesn't actually limit very much.
The above link will take you to Holman's Biotech IP Blog, which has a very extensive discussion of this case. Unfortunately Holman, like many of the blogosphere's commentators on IP matters, is a patent hawk. He believes the stronger is the legal protection for patent hoilders, the better. I, on the other hand, am a dogged patent dove, or maybe a dovish patent dog (allegorical zoos become confusing): so on my anarcho-cap bias alone I would have been happy to see this case go the other way.
It still might, because SCOTUS could yet get it. The Bilski decision indicates they want to do something about this field of law, and they obviously didn't think that decision was a proper vehicle for doing anything bold. Maybe this one will be more to their liking.
As to the "physical phenomena" limit in particular, I'll note that back in 1948 the court said that the characteristics of certain bacteria, "like the heat of the sun, or electricity, or the qualities of metals, are part of the storehouse of knowledge of all men. They are manifestations of the laws of nature, free to all men and reserved exclusively to none." Here's a link to that decision, by William O. Douglas.
Love that oracular Douglasite prose.
21 January 2011
Federal Circuit: Prometheus
In December the Federal Circuit issued a ruling in Prometheus Laboratories v. Mayo Collaborative Services, an important test of where the patent-law winds might blow next, in the wake of last summer's Bilski decision from the Supreme Court.
You'll recall that in June 2010 the Supreme Court rejected the notion that Bernard Bilski was entitled to a patent on certain abstract ideas for hedging against energy commodity price increases. Although four of the Justices wanted a bright-line rule against "business method" patents in general, that fell short of a majority, and did not represent the judgment of the court, which as expressed in Justice Kennedy's decision was a rather ad hoc this-case-only sort of thing.
In the Prometheus case, the lab named after the god chained to a rock claims a right to a method of determining the proper dosage of a particular drug for a particular patient. The drugs in question are known as 6-MP and AZA, both of which turn into certain metabolites within the human body. The method, then, is to monitor the patient, determine the level of these metabolites, and keep increasing the dosage until those metabolites get into the desired range. If they are present in an amount above the desired range, decrease the dosage!
Mayo Collaborative argued that the way the body metabolizes 6-MO anbd AZA is a natural phenomenon, that natural phenomena are just as unpatentable as are abstract ideas, and that thus under Bilski this patent should be disallowed.
Even before the resolution of Bilski, this argument was successful before the district court. But the appeals court, the first time it heard this case, before the Supreme Court had decided Bilski, held for Prometheus. After Bilski, SCOTUS sent Prometheus back to the Federal Circuit for reconsideration.
The news then is that the circuit court judges have now taken the position: we have reconsidered it, only to conclude that we were right the first time around.
More thoughts on this case tomorrow.
You'll recall that in June 2010 the Supreme Court rejected the notion that Bernard Bilski was entitled to a patent on certain abstract ideas for hedging against energy commodity price increases. Although four of the Justices wanted a bright-line rule against "business method" patents in general, that fell short of a majority, and did not represent the judgment of the court, which as expressed in Justice Kennedy's decision was a rather ad hoc this-case-only sort of thing.
In the Prometheus case, the lab named after the god chained to a rock claims a right to a method of determining the proper dosage of a particular drug for a particular patient. The drugs in question are known as 6-MP and AZA, both of which turn into certain metabolites within the human body. The method, then, is to monitor the patient, determine the level of these metabolites, and keep increasing the dosage until those metabolites get into the desired range. If they are present in an amount above the desired range, decrease the dosage!
Mayo Collaborative argued that the way the body metabolizes 6-MO anbd AZA is a natural phenomenon, that natural phenomena are just as unpatentable as are abstract ideas, and that thus under Bilski this patent should be disallowed.
Even before the resolution of Bilski, this argument was successful before the district court. But the appeals court, the first time it heard this case, before the Supreme Court had decided Bilski, held for Prometheus. After Bilski, SCOTUS sent Prometheus back to the Federal Circuit for reconsideration.
The news then is that the circuit court judges have now taken the position: we have reconsidered it, only to conclude that we were right the first time around.
More thoughts on this case tomorrow.
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