Wednesday, August 23, 2017

Ahead of this Week's Uber Earnings (loss) Report, A Serious Question

Speaking of "core, possibly existential" questions (immediately below), here's a good one from Reuters:

True price of an Uber ride in question as investors assess firm's value

What is the true cost of an Uber ride?

That simple question is often lost among the many controversies facing the ride-services company as it tries to hire a new chief executive and resolve a bitter dispute with the old one, Travis Kalanick.

But it may be the most important question of all when it comes to determining the value of Uber Technologies Inc [UBER.UL], which has built its business on massive subsidies to both riders and drivers, producing huge losses in the process, and has yet to show that it can maintain growth without them.

Uber will report second-quarter financials to investors this week, which will offer fresh insight on whether the company can get profitable any time soon.

Although private, Uber has started releasing limited quarterly financial data, and in May reported a loss of $708 million for the first quarter, down from $991 million in the fourth quarter. The upcoming financial report will show further improvement on margins, according to an Uber executive, but the company continues to spend heavily on subsidized rides in certain markets.

The issue of Uber's valuation is hardly academic amid a boardroom battle over control of the company. Early backer Benchmark Capital has sued former CEO Kalanick and fought with other investors, some of whom have offered to buy Benchmark out.

The question vexing everyone is what the company is worth. Benchmark in a series of Tweets earlier this month indicated it believed Uber will soon be worth more than $100 billion. Outside investors contemplating buying Uber shares, however, have indicated they think the company is worth less than its current $68 billion valuation - perhaps much less....MUCH MORE

Related, at Alphaville:
A question about Uber’s fake valuation

A Potential Source of Demand for the Art Market (and bitcoin)

News on the US Treasury's Financial Crimes Enforcement Network.
First up, an observation from Marion Maneker at Art Market Monitor:
In an effort to prevent high-end real estate purchased through LLCs or other shell companies from becoming a money-laundering channel, FinCen created a pilot program to use title insurance companies to reveal beneficial ownership. That program has now been expanded to include Hawaii and six other cities:
In January 2016, FinCEN issued GTOs to require U.S. title insurance companies to report beneficial ownership information on legal entities, including shell companies, used to purchase certain luxury residential real estate in Manhattan and Miami—specifically, luxury residential property purchased by a shell company without a bank loan and made at least in part using a cashier’s check or similar instrument....MORE
If you don't know his background, before Art Market Monitor, Mr. Maneker was publisher of HarperCollins’s business books imprint. He goes on to note:
... Nonetheless, tighter controls on real estate transactions may have the effect of diverting more surplus cash into tangible assets like art and collectibles.
Which leads us to a core, possibly existential question regarding cryptocurrencies.
From FT Alphaville:

What is crypto’s agenda really?
Are crypto pioneers looking to prove that laissez faire anarchic mechanisms are capable of creating a caveat emptor stateless decentralised utopia where every man is king of his own domain, and where the state is rendered entirely pointless?

Or are they engineering a means by which the world’s dark markets, criminal networks, rentiers and tax-evaders can continue to suck on the productive population through opaque and shadowy parallel networks, while they continue to give nothing back in return?

Because if it’s the latter, a steady campaign of propaganda to present what is effectively the reemergence of unregulated and predatory shadow banking systems — this time on steroids — as legitimate technical innovation would be necessary.

For this — arguably the world’s greatest mafia ruse — to work, everyday Joes would have to be convinced that handing hard earned money over to crypto investments or accepting crypto directly in exchange for goods is a positive sum activity and nothing akin to sponsoring global illicit activity.

So how best to achieve this if not through the mass deployment of technological buzzwords to disguise what are in fact well-established financial mechanisms and processes as something cutting edge and new? By this process, basic spread-betting platforms and OTC derivatives systems can be reimagined as “tokenised investments“, offering value-creating opportunities as opposed to zero-sum gambling traps to the financially illiterate.

And if that were the case, you’d hope the world’s media would be on the case to expose what’s really going on....MUCH MORE
That was the FT's Izabella Kaminska who, unless I'm missing something, just nonchalantly threw down a challenge to the powers-that-be that they won't be able to ignore.

"End of the checkout line: the looming crisis for American cashiers"

Following on yesterday's "A Vision of the Amazon/Whole Foods Future (AMZN)".

From The Guardian

Donald Trump is fixated on a vision of masculine, blue-collar employment. But the retail sector has long had a far greater impact on American employment – and checkout-line technology is putting it at risk
The day before a fully automated grocery store opened its doors in 1939, the inventor Clarence Saunders took out a full page advertisement in the Memphis Press-Scimitar warning “old duds” with “cobwebby brains” to keep away. The Keedoozle, with its glass cases of merchandise and high-tech system of circuitry and conveyer belts, was cutting edge for the era and only those “of spirit, of understanding” should dare enter.

Inside the gleaming Tennessee store, shoppers inserted a key into a slot below their chosen items, producing a ticker tape list that, when fed into a machine, sent the goods traveling down a conveyer belt and into the hands of the customer. “People could just get what they want – boom, it comes out – and move on,” recalled Jim Riot, 75, who visited the store as a child. “It felt like it was The Jetsons.”

Despite Saunders’s best efforts, the Keedoozle’s circuits frequently failed and the store closed for good by 1949.

But 72 years after he attempted to patent his idea, advances in robotics, artificial intelligence, and other technologies are making the dream of a worker-free store a reality. And American cashiers may soon be checking out.

A recent analysis by Cornerstone Capital Group suggests that 7.5m retail jobs – the most common type of job in the country – are at “high risk of computerization”, with the 3.5m cashiers likely to be particularly hard hit. 

Another report, by McKinsey, suggests that a new generation of high tech grocery stores that automatically charge customers for the goods they take – no check-out required – and use robots for inventory and stocking could reduce the number of labor hours needed by nearly two-thirds. It all translates into millions of Americans’ jobs under threat.

Alfredo Duran, a 37-year-old New Yorker, has been staring down that threat. He began his retail career at the Gap, taking part in that quintessential American rite of passage: getting a summer job in high school. Twenty-one years later – after a career that took him from fast fashion chains to department stores to high-end boutiques and saw him climb the ladder from cashier to visual merchandiser to store manager – he’s looking for a way out.

“Retail used to be a career,” Duran said. “You actually sat with your store manager and told them, ‘This is where I see myself in five years.’ No one thinks like that anymore. It’s just a warm body who can pick up the clothes that were thrown on the floor.”...MORE
 Most recently on cashiers:
June 23, 2017
Signposts: McDonald's hits all-time high as Wall Street cheers replacement of cashiers with kiosks (MCD)
It's all good, right?
The cashiers will simply retrain as roboticists and robotics technicians.
Or so the technocrats tell me....
... Just one question for the technocrats, "Why were the cashiers cashiers in the first place?"

Which was foreshadowed by August 2014's "Cashiers Replaced By Machines at McDonalds (MCD)":
This is a test, this is only a test.
If this had been an actual robot uprising against minimum wage workers you would have been instructed where to apply for unemployment compensation....
The robots are moving slower than I thought they would but they are indeed making inroads.
If interested see also David Byrne (yes, that David Byrne) in:
on Eliminating the Human.

"How the Bank of Japan can get really crazy"

From Asia Times, July 26:

This is the first in a two-part series on how the Bank of Japan can reboot efforts to revive the country’s deflation-plagued economy
Bank of Japan Governor Haruhiko Kuroda is watching his back even more than he’s surveying for hints of inflation in the world’s third largest economy.
The knives are out for the most famous economist in Tokyo, and why isn’t hard to figure out.

With Prime Minister Shinzo Abe’s approval ratings lower than Donald Trump’s, Japan’s leader is desperate for a win.

Voters might look beyond the latest cronyism cloud over this government if wages were rising and the economy was humming along five years into Abenomics.

But wages aren’t rising so Abe is looking where embattled Japanese leaders always do when the going gets tough: the BOJ.

Tokyo tongues are wagging as Abe advisors Nobuyuki Nakahara and Etsuro Honda (who’s called for “regime change”) suggest Kuroda should go.

Koichi Hamada, a key Abenomics architect, wants the governor to get a second term come March. Kuroda is clearly being nudged to step on the monetary gas anew — or clean out his office.

That could mean another round of shock-and-awe easing and a sharply weaker yen.
As Kuroda’s BOJ comes up short in generating inflation, what are its options?

Obviously, Kuroda needs a major assist from Abe. The BOJ’s historic easing, its cornering of bond and stock markets, was meant to grease the skids for a deregulatory Big Bang.

But steps to loosen labor markets, encourage entrepreneurship, modernize the tax code, empower women and boost productivity are few and far between.

Lacking confidence, companies are sitting on trillions of dollars of cash rather than fattening paychecks or investing in new industries.
The stink of scandal distracting Abe’s team, and buzz about another Cabinet reshuffle, has all eyes on the BOJ.

The Oxford-trained Kuroda has resisted going further down the quantitative-easing path, lest the BOJ enter People’s Bank of China territory.

But then, one could argue the BOJ, which has been at zero rates and beyond for 20 years, is about as independent as indentured servant. In other words, why stop here?

Fire up that helicopter
The BOJ’s titanically large purchases have immobilized the government bond market, in which volatility has become a rare phenomenon.

Its massive purchases of exchange-traded funds –- about $53 billion annually –- are distorting the stock market.

The BOJ should aim its firepower elsewhere. Kuroda could buy up large blocks of mortgage-backed and asset-backed securities. He could load up on tens of billions of dollars of corporate debt or foreign bonds to weaken the yen.

Why not also take local-government debt onto the BOJ’s balance sheet?

Look at the weakest among Japan’s 47 prefectures and offer them fiscal space to borrow anew to cultivate startup booms, finance improvements in productivity or pay for infrastructure improvements.

Next, Kuroda could get really creative and buy up distressed properties to refill rural government coffers. He could overpay for plots of unused municipal land, white-elephant city-hall buildings, stadiums, museums, desolated ski resorts, amusements parks and those infamous “international” airports with one overseas flight.

Go the full Takahashi
The BOJ could monetize debt the way Tokyo did in the early 1930s under then-Finance Minister Korekiyo Takahashi....MUCH MORE

Part II: Why Japan just can’t quit the ‘Deflationary Mindset’

Uh Oh: "EU starts in-depth probe of Bayer, Monsanto deal"

From Reuters, Aug. 22:
The European Commission has started an in-depth investigation of Bayer's planned $66 billion takeover of U.S. seeds group Monsanto, saying it was worried about competition in various pesticide and seeds markets.

The deal would create the world's largest integrated pesticides and seeds company, the Commission said, adding this limited the number of competitors selling herbicides and seeds in Europe.
"The Commission has preliminary concerns that the proposed acquisition could reduce competition in a number of different markets resulting in higher prices, lower quality, less choice and less innovation," it said in a statement on Tuesday. 

While the Commission could block the deal, it has approved others in the industry, such as Dow's tie-up with DuPont and ChemChina's [CNNCC.UL] takeover of Syngenta - although only after securing big concessions. 

The Commission said divestments offered by Bayer so far did not go far enough and that it aimed to make a final decision on the deal by Jan. 8.

"Bayer looks forward to continuing to work constructively with the Commission with a view to obtaining the Commission's approval," the German company said in a statement, adding it still aimed to have the transaction approved by the year end. 

Among individual markets where competition was at risk, the Commission named Monsanto's weed killer glyphosate, or Roundup, which competes with Bayer's glufosinate; vegetable and canola seeds, as well as licensing of cotton seed technology to peers. 

A merger would also reduce competition in the market for the genetic traits behind herbicide tolerance, which are typically licensed out to third-party seed companies. 

In addition, the Commission said the deal might slow the race to develop new products, such as wheat seeds and herbicides against weeds that have grown resistant to existing products.

DIGITAL AGRICULTURE
More broadly, the regulator also took issue with Bayer's plan to create combined offerings of seeds and pesticides with the help of new digital farming tools, which include sensors, software and precision machines....MORE
HT: TalkingBizNews 

"Wealth of the world's top tech entrepreneurs surpasses $1 trillion"

This is the post I was going for when the link immediately below popped up.
Despite the fact the technology has been a laggard in its development. a bit stodgy actually, I think Michael Bloomberg has a claim to a place on the tech list.
That would add something like $50 billion to the total.

The 10 richest tech billionaires in the world
Rank Name Worth
1 Bill Gates $84.5bn
2 Jeff Bezos $81.7bn
3 Mark Zuckerberg $69.6bn
4 Larry Ellison $59.3bn
5 Larry Page $43.9bn
6 Sergey Brin $42.7bn
7 Jack Ma $37.4bn
8 Ma Huateng $36.7bn
9 Steve Ballmer $32.9bn
10 Michael Dell $22.4bn

From City AM:
The collective wealth of the world's richest tech billionaires has surpassed an astonishing $1 trillion for the first time, new figures reveal.

The net worths of top tech entrepreneurs such as Bill Gates, Mark Zuckerberg and Jeff Bezos have rocketed by a combined 21 per cent over the past year to reach $1.08 trillion, according to Forbes newly released 100 richest people in tech list.

Microsoft founder Gates tops the list with $84.5bn, even after donating billions to charity, closely followed by Amazon founder and chief Bezos on $81.7bn. He earlier this year briefly surpassed Gates to take the top spot as not only the richest person in tech, but in the entire world.

Facebook founder and top boss Zuckerberg is in third position, ut was the list's biggest gainer this year, adding $15.6bn to his wealth thanks to the social network's rising stock price.

In fact the boom in tech wealth is down to rising tech stock across the board. Facebook has risen 44 per cent over the past 14 months, Microsoft's 46 per cent and Amazon's 27 per cent....MORE 

"Behind the hype: Machine learning in investment management" (Barclays June 15 report)

From City AM, August 11:
In a recent article, I discussed some of the significant progress being made in machine learning–enabled artificial intelligence and some of its potential drawbacks as well as the challenges it poses for regulators. Now, I want to bring your attention to a very interesting Barclays report that looks at the deployment of quantitative fund strategies, and in particular, the role of machine learning in investment management.

You can read more articles on technology’s role in finance by Sviatoslav Rosov, PhD, CFA on the Market Integrity Insights blog.

Big data: Costly, but is it useful?
Although big data is usually directly associated with machine learning, there is still a debate whether new data sources, such as web crawling through news or social media, credit card data, geolocation data, and so on, is helpful in the investment process. Some specific examples of trading strategies based on such data include using Twitter sentiment to make bets on the equity market as a whole or individual stocks in particular or using geolocation data to estimate retail activity relevant to individual stocks (e.g., footfall at retail stores).

The Barclays report states that 54% of surveyed investment managers use alternative data, such as web crawling social media data, satellite data, or credit card data. This finding suggests it is less prevalent than tick data (100% usage) or fundamental data (62% usage), such as balance sheet or income statement data, but more prevalent than economic data (38% usage), such as employment or inflation figures, or sell-side data (31% usage), such as analyst reports or broker recommendations.

Despite the widespread use of alternative data, 80% of surveyed investment managers in the Barclays report said that their biggest challenge was in assessing the usefulness of the data. Other concerns managers have are that the price of big data is typically greater than its usefulness, and it is difficult to clean and process for analysis. The key issue here is that the cost of the dataset is not merely its up front cost but also the opportunity cost of time spent cleaning, filtering, and analysing a dataset that may ultimately not yield any actionable recommendations. 

Machine learning does the dirty work
Interestingly, machine learning may help reduce this opportunity cost of alternative data by improving and automating the data gathering, processing, and cleaning procedures. Existing sources of data can also be rendered cheaper and more effective by these improvements....MORE

Stock Market Prices Do Not Follow Random Walks

From Turing Finance, February 2016:

Because volatility seems to cluster in real life as well as the markets, it has been a while since my last article. Sorry about that. Today we will be taking our first giant leap along A Non-Random Walk down Wall Street.

The Non-Random Walk Series

A Non-Random Walk Down Wall Street is the cheeky title of an academically challenging textbook written by Lo and MacKinlay in response to the best-selling Wall Street classic, A Random Walk Down Wall Street, written by Professor Burton Malkiel. A Non-Random Walk Down Wall Street is a collection of papers which challenge the prevailing random walk hypothesis. Despite containing only outdated results and being mathematically unforgiving, it's an impressive textbook which has inspired me to write a series of articles about it.

This series of articles has the following goals: Bolster or invalidate my original findings using the NIST test suite; Translate Lo and MacKinlay's papers and tests into more intuitive terms; Extend the results to the present day to determine if they are still relevant; Extend the results to emerging markets with a strong focus on South Africa; And bridge the theoretical and practical gap between machine learning and market randomness. Whew!

This series is also inspired by many of the thoughtful comments I received after I published my post about the random walk hypothesis, Hacking The Random Walk Hypothesis. So please keep the comments coming.

P.S. Simply because market randomness tests don't exactly make for great WordPress featured images, the featured images for this series of articles will be screenshots from all of my favourite Wall Street inspired films. This article's featured image is from the most recent Wall Street inspired film to hit the box office: The Big Short. If you haven't seen it yet, do yourself a big favour and go watch it. Afterwards, if you want more information you can always suffer through an earlier, non technical article of mine: A Recipe for the 2008 Financial Crisis.

Article Outline

This series will début with Lo and MacKinlay's first paper: Stock Markets Do Not Follow Random Walks: Evidence from a Simple Specification Test. In this paper Lo and MacKinlay exploited the fact that under a Geometric Brownian Motion model with Stochastic Volatility variance estimates are linear in the sampling interval, to devise a statistical test for the random walk hypothesis. This post covers the theory and application of this test.
This post is broken up into the following sections:
  1. Efficiency, The Markov Property, and Random Walks
  2. Variants of the Random Walk Hypothesis
  3. Stochastic Model Specification
  4. Stochastic Model Calibration (NB!)
  5. Variance Ratio Properties and Statistics
  6. A Heteroskedasticity-Consistent Variance Ratio Test
  7. Results obtained on Simulated Asset Prices
  8. Results obtained on Real Asset Prices
  9. Remarks and Conclusions
  10. Appendix A: Why R?
Should you have any criticisms or comments about this post or the random walk hypothesis in general, please let me know via the comments section at the end of this article. I always appreciate the input.

Efficiency, The Markov Property, and Random Walks

The random walk hypothesis is a popular theory which purports that stock market prices cannot be predicted and evolve according to a random walk. This hypothesis is a logical consequent of the weak form of the efficient market hypothesis which states that: future prices cannot be predicted by analyzing prices from the past ...

To a statistician the assertion that future prices cannot be predicted by analyzing prices from the past goes by a different name: the Markov property or, more intuitively, memorylessness. Any time series which satisfies the Markov property is called a Markov process and Random Walks are just a type of Markov process.

The idea that stock market prices may evolve according to a Markov process or, rather, random walk was proposed in 1900 by Louis Bachelier, a young scholar, in his seminal thesis entitled: The Theory of Speculation. In his paper he proposed using Brownian motion, a Markov (and Martingale) process, to model stock options. That said, it wasn't really until 1973, when the Black Scholes formula for derivatives pricing was published, that the idea gained traction.
Pollen_Grains_in_Water_Brownian_Motion
Physical Brownian Motion. Sourced from: https://www.youtube.com/watch?v=R5t-oA796to
Since then the use of stochastic processes for derivatives pricing has become industry standard. That having been said, the philosophical question regarding whether or not stock market prices really evolve according to a random walk or, at the very least, according to the popular stochastic processes used in industry today, remains. To paraphrase Queen, we are left wondering: is this [The Random Walk Hypothesis] real life? Is this just fantasy?

Personally my mind rebels against the theory because it is too elegant; too simple. I like complexity; I like chaos. So I choose to spend my spare time learning more about the theory of randomness and I enjoy trying to find ways to test the conventional wisdom ... and hopefully someday learn to beat the market consistently ;-). 

Variants of the Random Walk Hypothesis

A typical test of the random walk hypothesis involves three steps. First off you assume that asset prices do evolve according to a random walk and you select an appropriate stochastic model. Secondly, you define which statistical properties you would therefore expect to see in asset prices. And lastly, you test whether or not the asset prices exhibit the expected properties. If the asset prices don't exhibit the expected properties, then the assets don't evolve according to the model of the random walk hypothesis you assumed they did to begin with.

It's not good enough to simply state that market returns aren't random, you need to also specify what type of random they aren't.

Admittedly the fact that I didn't follow this process exactly in my previous article on Hacking The Random Walk Hypothesis was its biggest shortcoming. Luckily a supportive statistician on Reddit helped me see the light: it is not good enough to simply state that market returns aren't random, you need to also specify what type of random they aren't. In light of this below I have defined three popular forms of the random walk hypothesis.

Homoscedasticity
RW1: The first and strongest form of the random walk hypothesis assumes that the random disturbance, ϵt, is independent and identically distributed (IID). This corresponds to the Geometric Brownian Motion Model wherein volatility of the random disturbance, ϵt, allows only for homoskedastic increments (constant σ). Under this hypothesis, variance is a linear function of time (discussed in more detail in the next section).

Heteroscedasticity
RW2: The second, weaker form of the random walk hypothesis relaxes the identically distributed assumption and assumes that the random disturbance, ϵt, is independent and not identically distributed (INID). This corresponds to the Heston Model wherein the volatility of ϵtalso allows for unconditional heteroskedastic increments. Under this hypothesis, variance is a non-linear function of time (discussed in the next section).

Arch model
RW3: The third and weakest form of the random walk hypothesis relaxes the independence assumption meaning that it allows for conditional heteroskedastic increments in ϵt. This corresponds to some random walk process wherein the volatility either has some sort of non-linear structure (it is conditional on itself) or it is conditional on another random variable. Stochastic processes which employ ARCH (Autoregressive Conditional Heteroscedasticity) and GARCH (Generalized AutoRegressive Conditional Heteroscedasticity) models of volatility belong to this category.

In other words, any successful refutation of the random walk hypothesis must, ultimately, be model dependent. Furthermore, that model must clearly fall within the spectrum above. It just so happens that the weaker the form of the random walk hypothesis, the harder it is to disprove and the more powerful your statistical tests need to be.

To illustrate this point consider how easy it would be to show that some asset's prices don't evolve according to Brownian Motion but, on the other hand, how difficult it would be to show that the same asset's prices don't evolve according to some stochastic process without independent increments and with conditional heterskedasticity!
Dilbert random number generator
My favourite comic strip, Dilbert, gets it. Sourced from: http://dilbert.com/strip/2001-10-25

...MUCH MORE  

"Who really owns American farmland?"

From New Food Economy, July 31:

The answer, increasingly, is not American farmers. 
We’re used to thinking of escalating rents as an urban problem, something suffered mostly by the citizens of booming cities. So when city people look out over a farm—whether they see corn stalks, or long rows of fruit bushes, or cattle herds roving across wild grasses—the price of real estate is probably the last thing that’s going to come to mind. But the soil under farmers’ feet has become much more valuable in the past decade. While urban commercial real estate has skyrocketed in places like New York, San Francisco, and Washington, D.C., powerful investors have also sought to turn a profit by investing in the most valuable rural real estate: farmland. It’s a trend that’s driving up costs up for the people who grow our food, and—slowly—it’s started to change the economics of American agriculture.

Think of it this way: If you wanted to buy Iowa farmland in 1970, the average going price was $419 per acre, according to the Iowa State University Farmland Value Survey. By 2016, the price per acre was $7,183—a drop from the 2013 peak of $8,716, but still a colossal increase of 1,600 percent. For comparison, in the same period, the Dow Jones Industrial Average rose less than half as fast, from $2,633 to $21,476. Farmland, the Economist announced in 2014, had outperformed most asset classes for the previous 20 years, delivering average U.S. returns of 12 percent a year with low volatility.

That boom has resulted in more people and companies bidding on American farmland. And not just farmers. Financial investors, too. Institutional investors have long balanced their portfolios by putting part of their money in natural resources—goldmines and coal fields and forests. But farmland, which was largely held by small property owners and difficult for the financial industry to access, was largely off the table. That changed around 2007. In the wake of the stock market collapse, institutional investors were eager to find new places to park money that might prove more robust than the complex financial instruments that collapsed when the housing bubble burst. What they found was a market ready for change. The owners of farms were aging, and many were looking for a way to get cash out of the enterprises they’d built.

And so the real estate investment trusts, pension funds, and investment banks made their move. Today, the United States Department of Agriculture (USDA) estimates that at least 30 percent of American farmland is owned by non-operators who lease it out to farmers. And with a median age for the American farmer of about 55, it is anticipated that in the next five years, some 92,000,000 acres will change hands, with much of it passing to investors rather than traditional farmers.

But what about the people—often tenant farmers—who actually work the land being acquired? During the same period that farmland prices started gaining steam, many crop prices have stagnated or fallen. After hitting highs above $8 a bushel in 2012, corn prices today have fallen back to less than $4 a bushel—about what they were ten years ago, in 2007, when farmland prices first started to soar.

It’s a tenuous predicament, growing low-cost food, feed, and fuel (corn-based ethanol) on ever-more-expensive land, and it raises a host of questions. Is this a sustainable situation? What happens to small farmers? And are we looking at a bubble that will burst?

Three big factors have contributed to the rapid increase in the prices paid for farmland—which is usually defined to include grazing land and forests—according to Wendong Zhang, an assistant professor of economics at Iowa State University. (Zhang tracks farmland prices, especially Iowa farmland prices, which are among the best documented in the country.)

First, interest rates, since the financial crash of 2007–2008, have been at historic lows, which tends to drive asset prices up. There has been “phenomenal growth” in the ethanol market, Zhang says, linked to increasing interest in sustainable fuels. Indeed, if you graph ethanol production over the past 20 years, it shows exactly the same explosive growth as land prices. And as exports to China and elsewhere have increased, farm income has risen. “Farm income is the variable to track” in analyzing land prices, Zhang explains.

But there’s an additional factor: well-heeled investors are snapping up farmland, driving prices up. Here’s how the Economist explained it:  “Institutional investors such as pension funds see farmland as fertile ground to plough, either doing their own deals or farming them out to specialist funds. Some act as landlords by buying land and leasing it out. Others buy plots of low-value land, such as pastures, and upgrade them to higher-yielding orchards.”....
...MUCH MORE 

Questions America Wants Answered: "What Is Idiosyncratic Alpha?"

From
A reference to idiosyncratic trading strategies was made in a market commentary by Neal Berger, the President of Eagle’s View Asset Management. In this article we attempt to clarify what these idiosyncratic strategies are.

Below is an excerpt from Neal Berger’s market commentary as reported by Matthias Knab (added emphasis is mine.)
In sum, we believe quantitative strategies still have a place in our portfolio. Traditional and more ‘pedestrian’ quantitative strategies such as fundamental factor, momentum, and mean-reversion based statistical arbitrage do not. We have already, or, are in the process of exiting those strategies and Managers who we believe run more pedestrian quantitative strategies that have not recognized or kept pace with the increased competition in quant and the reduction in available alpha due to the reasons mentioned above. While we are reducing quant broadly, within quant, we are increasing our allocation to strategies and Managers who run idiosyncratic and highly capacity constrained strategies that either require a highly specialized skill-set and knowledge to effectuate, or, are simply too capacity constrained to attract competition from the larger players.
The reasons mentioned for the reduction of alpha are primarily due to crowding effect in “pedestrian strategies” and less availability of dumb money to profit from. It was argued that a way out of this conundrum for some funds at least is through a shift to idiosyncratic alpha. 

Let us start with this definition:
idiosyncratic: peculiar or individual.

According to the above definition then, popular strategies, including trend-following, cross-sectional and absolute momentum, statistical arbitrage, including long/short market neutral, do not offer idiosyncratic alpha since they are widely known and are of high capacity. For example, CTAs are being already impacted by relying on high capacity and widely used strategies; alpha has diminished and CTAs are now trying to market these strategies in the context of low correlation with stock market and alternative beta; i.e., the past high absolute return potential is now gone, for good according to Neal Berger.

Therefore, we know what idiosyncratic strategies are not about. They are certainly not the strategies that are fully described in a few lines of code in some popular books. Below is an effort to identify a few of these strategies as the potential domain is large but difficult to fully research.

Idiosyncratic alpha strategies
Event and sentiment driven
Event-driven strategies attempt to generate alpha from corporate events that include mergers, acquisitions, earnings surprises, bankruptcies, CEO replacements, debt restructuring, to name a few.

Tuesday, August 22, 2017

"Estonia could be the first country to do its own initial coin offering"

As noted in the intro to 2013's "The World is Going Artisanal-- Caffeine: The Magazine":
It was in 2005 that I first started hearing normally sober and reliable people discuss the economy in terms that, loosely translated, said: Everyone will make their fortune by swapping real estate and selling each other "Tall half-skinny half-1 percent extra hot split quad shot lattes with whip"....
It appears I'll have to add ICO's to the equation: "In the future everyone will make their fortune by selling coffee to each other, trading real estate back and forth and buying each other's crypto"

From City AM:

Estonia proposes estcoin, a government backed cryptocurrency, issued via an initial coin offering (ICO) after e-residency success
Estonia is living up to its digital reputation and setting tongues wagging with its latest idea: its very own digital currency issued via an initial coin offering (ICO).

The buzz word of the moment in the heady world of cyptocurrencies, ICOs, are being used to raise cash via a digital token that's issued to investors.

What investors get back in return depends what the company offers, much like crowdfunding, but can be some sort of stake in the company or merely being able to use the blockchain-based software it's building.

But what's on offer in a potential ICO of a nation state? That's exactly what Estonia wants to work out.
The head of its innovative e-residency programme has said the country is considering what the issuance of "estcoin", the country's very own digital currency, would look like.

In a blog post, Kaspar Korjus said: "Estcoins could be managed by the Republic of Estonia, but accessed by anyone in the world through its e-Residency programme and launched through an Initial Coin Offering (ICO)."

And the man behind the most succesful ICO to date which kicked off the trend is involved. Vitalik Buterin, the founder of Ethereum, (now the second most valuable cryptocurrency in the world) is offering his feedback on the project and suggest it could be a way for the country to attract international investment....MORE

A Vision of the Amazon/Whole Foods Future (AMZN)

From Fast CoDesign:

A Wild Vision Of The Future Run By Amazon And Whole Foods
Drones. Shared refrigerators. Hydroponic garages. And never setting foot in a grocery store again. 

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Since Amazon bought Whole Foods for $13.7 billion, consumers have been left wondering what that partnership will ultimately look like. Will Whole Foods stores just become another face for Amazon’s anonymous distribution centers? Will Prime memberships include access to more local produce? Or will retail, as we know it, fundamentally change, as Amazon’s hyper efficiency mixes with the Whole Foods fresh, local mentality to create something entirely new? 
Austin-based design firm Argodesign is betting on the latter. As a thought experiment, the studio mocked up a provocative series of concepts suggesting what an Amazon Foods could look like, if powered by drones, Echo refrigerators, and a sharing economy model reminiscent of Airbnb or Uber.
 
Meet The Echo Fridge
Right now, you might order groceries through your Echo personal assistant, or reorder something through an Amazon Dash button. These items might arrive in a few hours or a few days. But what if Amazon/Whole Foods could move its stock from distribution centers and store shelves to your shelves, predictively, and adaptively?

That’s the idea of the Echo Fridge. It has an exterior-facing door. In suburban houses, it’s large, allowing a small vehicle to pull up. In urban areas, it’s a box about the size of an AC unit. Through this door, the fridge would take deliveries of food Amazon believes you will want. But you don’t pay for them unless you use them.

On the kitchen side of the Echo Fridge, you might see two doors. The door on the right would have Amazon’s suggested items, ready to eat. Move them to the left door–your personal space–and they’d be purchased automatically. Leave them, and they might be removed, delivered to a neighbor who wants that bag of oranges or bottle of ketchup. 

“When we started looking at the whole problem, we started from the high level: improving distribution through robotics, and this centerpiece idea of making the refrigerator the point of sale,” says Mark Rolston, founder of Argodesign. “If you start with that point of logic, because of improved distribution, availability of robotics, and support of drones, you start to realize, the inventory in the store starts to not really matter. And the store doesn’t matter as it does today to host inventory.”
This is the fundamental shift of the concept–the store is no longer the store. Your home is now the store. And while, yes, it’s a slightly unsettling thought to not own everything in your fridge, where Argodesign takes this idea empowers the individual–as much as it enslaves them to Amazon’s will....MUCH MORE

The Journal Peer Review Process, Illustrated

From Digitopoly:

News from Management Science (Business Strategy)
I recently took over from Bruno Cassiman as the Department Editor for the Business Strategy section at Management Science. This seemed like a good opportunity to reflect on some changes being made — that is, implementing some of the ideas in Scholarly Publishing and its Discontents — as well as some things I have learned that may assist you if you are thinking of submitting here.

Expanded Editorial Board
At Management Science, referee selection and the main decision are handled by Associate Editors. I wanted to expand that board for Business Strategy and was fortunate to find many people willing to serve. Here is the new board.

Juan Alcácer, Harvard University
Kevin Boudreau, Northeastern University
Jennifer Brown, University of British Columbia
Meghan Busse, Northwestern University
Leemore Dafny, Harvard University
Andrea Fosfuri, Bocconi University
Maria Guadalupe, INSEAD
Neil Gandal, Tel Aviv University
Mara Lederman, University of Toronto
Hong Luo, Harvard University
Fiona Murray, Massachusetts Institute of Technology
Evan Rawley, University of Minnesota
Michael Ryall, University of Toronto
Rachelle Sampson, University of Maryland, College Park
Timothy Simcoe, Boston University
Catherine Thomas, London School of Economics
Rosemarie Ziedonis, Boston University

New Editorial Statement
There has been much concern about whether top journals are taking sufficient risks. So I wanted the editorial statement to reflect a weighting of ‘scientific impact’ more than ‘immediate managerial application.’...MORE
...Your best bet not to get desk rejected is to state in a cover letter what your contribution to business strategy is, taking into account what has been written in the editorial statement. Also, don’t have titles with more than 4 buzz words. Believe it or not, it happens alot and ‘atell’ for me.

Second, we are going to aim for one round of revisions. Sometimes this can go for many rounds. The goal is to have the second revision be a straight up or down, accept/reject decision....

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Target Corp. Cuts Ties With Hampton Creek: Just Say No to Just Mayo

From Bloomberg:
Target Corp. will no longer sell products made by food startup Hampton Creek Inc. after an internal review, the latest major blow to the beleaguered maker of Just Mayo eggless mayonnaise and other plant-based foods.

The retail giant decided to end the relationship about two months after receiving what it described as “specific and serious food safety allegations about Hampton Creek products.” Target pulled the San Francisco company’s products from shelves in June while it looked into the matter and shared the claims with the U.S. Food and Drug Administration.

Hampton Creek has said its products are safe and comply with FDA rules. The FDA has said it won’t investigate unless it receives reports of consumers getting sick and has “no safety concerns with Hampton Creek at this time.”

“Although the FDA is not pursuing this further, we used the opportunity to review our portfolio, as we regularly do, and decided to reconsider our relationship with Hampton Creek,” Jenna Reck, a spokeswoman for Target, wrote in an email Friday. “We are not planning to bring Hampton Creek products back to Target and have openly communicated our decision with the Hampton Creek team.”
Last week, Hampton Creek released a statement saying the FDA had concluded its products are safe and that the company hoped to resolve the issue with Target soon. Hampton Creek said its public statement was to blame for the retailer’s decision. “Target informed us that sharing with the public the FDA’s conclusion that our products are safe violated Target’s vendor communication guidelines,” Andrew Noyes, a spokesman for Hampton Creek, wrote in an email.

Target said the statement was one of several factors. “There were multiple reasons we terminated our relationship with Hampton Creek and all of the reasons were clearly communicated to Hampton Creek,” Reck said by phone. She declined to elaborate, saying Target doesn’t discuss details of its business relationships....MORE

The Consulting Biz

From Dilbert.com:

Dogbert's Unreliable Research Company - Dilbert by Scott Adams


K@W: "Why Automation Is Killing the Property Appraisal Business"

From Knowledge@Wharton:
Property assessment has long been a solid industry with steady work for those willing to undertake the education and training required to enter the field. But that stability is changing thanks to automation. The number of appraisers is shrinking as software gets more accurate at valuing property and is increasingly integrated into the sale process. Benjamin Keys, Wharton professor of real estate, and Stan Humphries, chief analytics officer at online real estate marketplace Zillow.com, recently appeared on the Knowledge@Wharton show on SiriusXM channel 111 to discuss the changes and where the industry is headed. (Listen to the podcast at the top of this page.)

Following are key takeaways from their conversation:

The margin of error is decreasing as automation improves.
Zillow offers a tool it calls Zestimate that uses input factors to determine the worth of a property. The Zestimate, which has been around since the website’s inception in 2006, cannot be considered an official, certified appraisal. But it’s a start, said Humphries. It’s also getting better as the company pours more resources into research and development.

“Back when we launched, we put in about 43 million homes and had a median error rate of close to 14%,” he said. “Today, we value about 100 million homes every single night and our error rate is down to 4.3%. So, we’ve made a lot of advances in the accuracy of valuing homes.”

Zillow is pushing for even greater precision. The company is offering a monetary prize for its teams that can get the algorithm’s error rate down to 2% or 3%.

“Computerized models are going to get very accurate, although in the end there’s probably some role for human beings to be involved there,” Humphries said. “The question is, what is that role of that human being? Right now, appraisers are professionals. They have a high degree of discretion, and there’s a bit of an art to what they do. In the future, there is a role to make sure that the facts the computer is using are accurate, but that’s more of a technician type job as opposed to professional.”
Keys credits Zillow for improving virtual assessment methods and said automation is an undeniably growing part of the industry.

“I think it’s only a matter of time until the technology is strong enough and cheap enough, from the standpoint of the lenders and the buyers, to cut out the humans from this process and move to more of an algorithm-based process,” he said.

Digital appraising can reduce confirmation bias....
...MORE

Walmart-Amazon Battle of the Blimps (AMZN; WMT)

We've looked at a half-dozen Amazon patents over the last year but this is the first time we've had one from WMT.

From Übergizmo: 

Walmart Patents A Floating Blimp Warehouse

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Amazon isn’t the only retailer that’s looking into drone delivery. Walmart appears to be working on a similar concept but its solution might be a bit different compared to Amazon’s. Walmart has filed for a US patent for a floating blimp warehouse which will make delivers via drones. The idea is to have a floating warehouse up in the sky from where Walmart can instantly ship products to customers using drones.

According to the patent filing, the blimp-style floating warehouse would fly at heights between 500 and 1,000 feet. It will have multiple launch bays for sending drone deliveries. The blimp itself will either fly autonomously or be remotely controlled by a human pilot.

This solution could help Walmart lower the cost of fulfilling online orders, cutting down on “last mile” costs to a customer’s house which is normally handled by a logistics company...MORE.
From our Aug. 6 AMZN patent roundup:
"Amazon Wants to Build a Network of Mobile Drone Maintenance and Delivery Platforms" (AMZN)

...I do like the steampunk-retro Montgolfier Bros/Henri Giffard stylings of the the Amazon airships:



And one we missed.
Another Amazon Patent: Shipping Label With Built-in Parachute

Lessons in Asset Valuation: the Great Warrants Bubble of China

From the Naked Hedgie:
Investors exert a great deal of intellectual effort to determine the correct valuation of securities. Economic value is central to our decision making and it plays a major role in our intuitive psyche. In daily life, when we buy a loaf of bread or a tank of gasoline, we tend to have a good idea about what we think is cheap and what’s expensive. We like bargains, don’t enjoy being ripped off, and just as we are inclined to shop for value as consumers, we find value investing intuitively appealing. But here’s the critical difference between buying goods and investing: shopping for investments is speculative while buying stuff isn’t, and speculation activates the part of our mental circuitry that can heat up to a boiling point and overwhelm any rational consideration of value.

On aggregate, speculative activity frequently produces price trends and in some cases bubbles. Here’s how this dynamic shapes up: in making investments, our rational goal is to obtain the best possible return with the least risk necessary. If we buy a house or a stock for investment, we want to receive a stream of rents or dividends and to have the opportunity to sell the asset for a price that’s higher than what we paid. Since those outcomes depend on other market participants, we are obliged to reflect on what they might do. Thus, if house prices are going up we infer that people are keen on investing in real estate and that rising demand would push future house prices even higher. If we are convinced that this is the case, we might disregard the fact that houses are already expensive. In effect, led by the actions of others, we might accept inflated house prices and proceed with the investment anyway.

This dynamic was demonstrated empirically in a clever experiment designed by Colin F. Camerer at Caltech’s Experimental Economics Laboratory [1]. In this experiment, a group of students were asked to trade shares in a hypothetical company during 15 five-minute periods. The students were not allowed to discuss their actions and only communicated via buy and sell orders. To start with, each student received two shares and some money with which to buy more shares. At the end of each of the 15 periods, the shares paid a $0.24 dividend for a total payout of $3.60 per share throughout the experiment ($0.24 x 15). This provision removed any uncertainty about the shares’ value: at the start of the experiment, the maximum value of one share was $3.60 and this amount diminished by $0.24 after each round, since that amount of dividend was already paid out. The highest price any player should accept to pay for a share should not be one penny more than what that share would yield in remaining dividends.

However, Camerer’s experiment showed otherwise. When the experiment started the share price immediately jumped to $3.50, close to the shares’ rational value. But rather than steadily declining with each new round, the price remained near that level almost to the very end of the experiment. Even when the value of each share fell below $1, students were still willing to pay $3.50 to buy them. When the experimenter asked the students why they bought the shares at prices that obviously far exceeded their value, the students would reply that, “Sure I knew that prices were way too high, but I saw other people buying and selling at high prices. I figured I could buy, collect a dividend or two, and then sell at the same price to some other idiot.”[2]

A strange confluence of circumstances produced this very same dynamic in a real-life experience that became known as the Chinese Warrant Bubble, described in a remarkable paper by Princeton University’s Wei Xiong and Columbia University’s Jialin Yu [3].

Chinese Warrant Bubble
In an effort to develop China’s financial derivatives market, from August 2005 the China Securities Regulatory Commission (CSRC) started introducing a small number of warrants – financial instruments similar to options, issued by publicly trading corporations. Firms were allowed to issue call or put warrants. With call warrants, issuing firms granted investors the right to buy stock from them, and put warrants gave them the right to sell stock back to the issuing company at a specified strike price and time period during which investors could exercise their option to buy or sell stock shares.

Between 2005 and 2008, 18 put warrants with maturities from 9 to 24 months were issued to the public. During this very period, Chinese stock market experienced a strong bull run and its index vaulted from 1,080 points in June 2005 to 6,124 in October 2007. This rally quickly pushed most put warrants so deep out of the money that they became worthless. In spite of this, feverish speculation on these securities produced an extraordinary financial bubble, unique in history of bubbles because warrants continued trading at spectacularly high levels of turnover and very inflated prices, even as it became evident that their value clearly dropped to zero.

Consider the case of a Chinese liquor producer, WuLiangYe corporation.....MORE

"TEU Tokens and Blockchain Could Shape the Future of Container Shipping"

Good grief, don't give DryShips any ideas.
From gCaptain:
Blockchain initiative 300cubits has created a new type of cryptocurrency to solve liner shipping’s US$23bn “booking shortfall” conundrum.

Named TEU, the de-facto industry currency is distributed as tokens on the Ethereum network and will be tradeable on various global cryptocurrency exchanges.

300cubits claims the tokens will help to eliminate shipping’s “trust issue” by reducing the counterparty default risk, caused by shipper ‘no-shows’, and by carriers ‘rolling’ cargo.

According to New Jersey Institute of Technology’s Professor Michael Erlich, the impact of this booking shortfall can be quantified as 5m teu a year, which costs the industry $23bn when knock-on effects, such as carriers’ lost revenue and shippers’ additional inventory costs, are calculated.
300cubits’ solution is to use TEU tokens as booking deposits. The tokens are coded with a set of immutable conditions to create blockchain-enabled smart contracts to govern the booking transaction.
“Once committed, neither party can alter what has been agreed,” said 300cubits.

“Both the container lines and their customers will be given TEU tokens that will be held as deposits with conditions, and paid out later, upon the execution of the shipment booking.

“The container lines will be compensated with the TEU tokens if the customer does not turn up with cargo. Likewise, the customer will be compensated with the TEU tokens if their cargo is rolled.”
The no-show issue is clearly a pressing one for shipping lines. In June, CMA CGM introduced a $150 per teu cancellation fee for booked services to the Indian Subcontinent, Middle East Gulf and Red Sea ports.

However, according to 300cubits co-founder Johnson Leung, cancellation fees and other penalties can cause further inefficiencies.

“Shipping companies are already putting in a lot of resources and spending millions on this lack of trust issue,” he told The Loadstar....MORE

"Zinc's Supply Surge Is Coming"

The party in zinc, it's all anyone can talk about, may be coming to an end.

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From Bloomberg Gadfly, Aug. 18:
Zinc is on a tear.

After aluminum, the metal used in galvanizing steel and sunscreens has been the best performing of the London Metal Exchange's six main contracts so far this year. Over the past week, the price chart has gone vertical -- busting through the $3,000 a metric ton level for the first time in a decade with a 5.4 percent jump Wednesday.

Zinc's moment in the spotlight has been a long time coming, but bulls should watch out -- it may be short-lived.

For much of the past decade, the metal was considered among the least attractive on the LME. Because of supply that's widely distributed among a large group of producers and a tendency to occur geologically alongside other metals like lead, copper and silver, few miners are dedicated to maintaining profitable supply and demand in zinc.

No Control
The top 10 zinc miners account for only about a third of global annual production

Go back five years, and disinvestment was the order of the day. Mine closures, such as Vedanta Resources Plc's Lisheen pit in Ireland and MMG Ltd.'s Century in Australia, would yank about 1 million tons of annual supply from the world's 13 million-ton-a-year zinc market between 2012 and 2020, MMG's CEO Andrew Michelmore said in a 2014 presentation. New projects would fill less than half the gap, he said.

Sure enough, output dipped severely last year, particularly after Glencore Plc cut output at its McArthur River and Mount Isa mines in Australia in response to slumping prices in 2015. With China's pre-Communist Party Congress construction boom providing a boost to demand, the market has now run short: Exchange inventories last month touched their lowest levels since 2007....MORE

Meanwhile, in Northern China

We last visited Harbin in Aug. 6's "ICYMI: So this Worm Eats Plastic and Poops Antifreeze".

From Soylent News:
Researchers have improved the design of Cylindrical shaped Hall thrusters (CHTs), a type of ion drive used in spacecraft:
Researchers from the Harbin Institute of Technology in China have created a new inlet design for Cylindrical shaped Hall thrusters (CHTs) that may significantly increase the thrust and allows spaceships to travel greater distances.
[...] The researchers injected the propellant into the cylindrical chamber of the thruster by a number of nozzles that usually point straight in, toward the center of the cylinder. The angle of the inlet nozzles changed slightly, sending the propellant into a rapid circular motion and creating a vortex in the channel.
They then simulated the motion of the plasma in the channel for both nozzle angles using modeling and analysis software called COMSOL that uses a finite element approach to modeling molecular flow.
This resulted in a gas density near the periphery of the channel is higher when the nozzles are tilted and the thruster is run in vortex mode.
According to the study, the vortex inlet increases the propellant utilization of the thruster by 3.12 percent to 8.81 percent, thrust by 1.1 percent to 53.5 percent, specific impulse by 1.1 percent to 53.5 percent, thrust-to-power ratio by 10 percent to 63 percent and anode efficiency by 1.6 percent to 7.3 percent, greatly improving the thruster performance.
More likely to be deployed than EmDrive.

Effect of vortex inlet mode on low-power cylindrical Hall thruster (open, DOI: 10.1063/1.4986007) (DX)