Tuesday, November 20, 2012 - Extracting Meaning

Extracting Meaning

by Sinclair Noe

DOW – 7 = 12,788
SPX +0.92 = 1387
NAS + 0.61 = 2916
10 YR YLD + .04 = 1.66%
OIL + 1.22 = 86.67
GOLD – 3.80 = 1729.10
SILV + .08 = 33.29

There may be a ceasefire in the Middle East. An official for Hamas says a ceasefire deal has been reached. Officials for Israel and Egypt say not quite, some details are being worked out. Israel pressed on with its strikes in Gaza on the seventh day of its offensive and Palestinian rockets still flashed across the border. Secretary of State Clinton is in Israel to help broker a deal. A ceasefire may be announced within the hour, but that would just be a small step; actually enforcing the ceasefire would be more telling.

Federal Reserve Chairman Bernanke delivered a speech today to the New York Economic Club. Bernanke said one reason the recovery has been so disappointing is that the financial crisis appears to have lowered, at least for a time, how fast the economy can grow over the long run.

The crisis has reduced labor force participation and lowered productivity as businesses have trimmed investment. This suggests that the nation’s potential output has grown more slowly than expected in recent years. Potential output combines the economy’s long-run productivity rate and labor force growth. This means the economy has to grow faster than potential to bring down the unemployment rate. In some ways, this is Bernanke making the case against austerity and for stimulus.

However, Bernanke did not take sides on the fiscal cliff, only to say that politicians should not go over the cliff: “Uncertainty about how the fiscal cliff, the raising of the debt limit and the longer-term budget situation will be addressed appears already to be affecting private spending and investment decisions, and may be contributing to an increased sense of caution in financial markets.” He urged the members of Congress not to kick the can down the road. He said that putting off policy choices would only “prolong and intensify these uncertainties.”

In a question-and-answer session, Bernanke warned that Fed policy could not protect the economy if it goes over the cliff. “I don’t think the Fed has the tools to offset that,” he said. That's not exactly true. The Fed does have tools. The question is whether the Fed is willing to use them.

On the upside, Bernanke said not going over the fiscal cliff could be a good thing: “A plan for resolving the nation’s longer-term budgetary issues without harming the recovery could help make the new year a very good one for the American economy.”

Morgan Stanley has issued a report on the global economy and they are somewhat less sanguine than Bernanke. Morgan Stanley warns: the global economy is likely to be stuck in the "twilight zone" of sluggish growth in 2013, but if policymakers fail to act, it could get a lot worse. The bank's economics team forecasts a full-blown recession next year, under a pessimistic scenario, with global gross domestic product likely to plunge 2 percent.

The report says that: "More than ever, the economic outlook hinges upon the actions taken or not taken by governments and central banks.” Under the bank's more gloomy scenario, the US would go over the "fiscal cliff" leading to a contraction in US GDP for the first three quarters of 2013. In Europe, the bank's pessimistic scenario assumes a failure of the European Central Bank in cutting rates and a delay of its bond-buying program. The bank's most optimistic scenario forecasts GDP growth of 4 percent in 2013 compared to around 3.1 percent this year.

John Templeton, one of the greatest investors of all time, said that investors should buy at the point of maximum pessimism. Easy to say, hard to do, unless you have some unique insight or knowledge.

Prosecutors have charged a former SAC Capital employee with insider trading in a series of transactions that hedge fund titan Steven Cohen had personally signed off on.

In what they called "the most lucrative" insider-trading scheme ever, prosecutors alleged that Mathew Martoma helped Cohen's firm avoid losses and reap profits totaling $276 million in the summer of 2008 by using insider tips he got from a doctor about Elan Corp and Wyeth.

Martoma is the fifth person associated with SAC Capital, one of the most widely followed and influential hedge funds, to be charged with insider trading in either a criminal or civil proceeding. He had worked for a unit of SAC Capital called CR Intrinsic Investors in Stamford, Connecticut until 2010.

The criminal complaint against Martoma, while not mentioning Cohen by name, refers to him as the "owner" of the hedge fund and makes clear that Cohen and Martoma talked often about the fund's trading in shares of Elan and Wyeth. The court papers do not indicate that Cohen had knowledge of how Martoma obtained his information.

According to court papers, Martoma spoke in July 2008 to the "hedge fund owner" and recommended selling shares of Elan and Wyeth before a negative announcement on clinical trial results for an Alzheimer's drug jointly developed by the two companies. CR Intrinsic had initially taken long positions in Elan and Wyeth stocks before reversing itself over the course of one week, selling some stock and building up massive short positions that accounted for one fifth of all trading in Elan.

Martoma's lawyer, Charles Stillman, said his client was an "exceptional portfolio manager" and he is confident Martoma will be exonerated. A spokesman for SAC Capital said "Mr. Cohen and SAC are confident that they have acted appropriately and will continue to cooperate with the government's inquiry".

The charges against Martoma stem from the U.S. government's long-running investigation into improper trading in the $2 trillion hedge fund industry, which the Federal Bureau of Investigation has called, Operation Perfect Hedge. To date, the investigation has led to more than 50 convictions. Two former traders, Noah Freeman and Donald Longueuil, pleaded guilty to insider trading charges last year. Jon Horvath, a former analyst at a division of SAC pleaded guilty to insider trading charges in September. Another former SAC Capital employee, Jonathan Hollander, settled civil charges of insider trading last year with the SEC.

Hewlett-Packard acquired British software company Autonomy last year for $10.3 billion and today HP wrote that investment down by $8.8 billion. Apparently $5 billion of the $8.8 billion dollar writedown was due to: “accounting improprieties, misrepresentations and disclosure failures” at Autonomy.

I don't know much about HP and even less about Autonomy. Autonomy described itself in its last annual report as “the leading provider of Pan-Enterprise Search and Meaning Based Computing (MBC) solutions. Autonomy’s unique Intelligent Data Operating Layer (IDOL) platform enables organisations to harness the full richness of human information by extracting meaning from the mass of unstructured information they handle every day, which analysts estimate to constitute over 80% of all enterprise data.”

I don't know what that means but I don't think computers can harness the full richness of human information, although I might be wrong. If the software was so great, then why didn't HP use it to extract the full meaning of an $8.8 billion dollar writedown? Maybe the next multi-billion dollar acquisition will be software that can tell the difference between artificial intelligence and natural stupidity.

Almost 200 nations will meet in Doha from 26 November to 7 December to try to extend the Kyoto protocol, the existing plan for curbing greenhouse gas emissions by developed nations that runs to the end of 2012.

On Monday, the World Bank said current climate policies meant the world was heading for a warming of up to 4C by 2100. That will trigger deadly heat waves and droughts, cut food stocks and drive up sea levels.

Today, a coalition of the world's largest investors called on governments to ramp up action on climate change and boost clean energy investment or risk trillions of dollars in investments and disruption to economies.

In an open letter, the alliance of institutional investors, responsible for managing $22.5 trillion in assets, said rapidly growing greenhouse gas emissions and more extreme weather were increasing investment risks globally. The group called for dialogue between investors and governments to overhaul climate and energy policies. The group said the right policies would prompt institutional investors to significantly increase investments in cleaner energy and energy efficiency, citing existing policies that have unleashed billions of dollars of renewable energy investment in China, the United States and Europe.

And yet... change seems to move at a glacial pace.

Economists and financial theorists still do not get the vital interconnection between the true nature of the economic system and a healthy ecosystem. What will it take? One complex, indivisible, systemic crisis. We are now a couple of weeks into the aftermath of Hurricane Sandy and no one has yet improved upon the analysis of Bloomberg Businessweek's cover story on November 1 : "It's global warming, stupid."

We need an economy of sufficiency that does not demand exponential growth of material output from finite resources on a planet that is fixed in scale. This leads us well past pricing externalities; there are some things that go beyond pricing.

I thought I'd throw that out there because next week 200 nations will meet in Doha and it probably won't get much media coverage.