Trend: Rising Food Prices

(wikipedia: picture of a farm in Hebei, China)

Over here in Australia, the two blockbuster trading bets are on a rise and continued rise of mineral ores, oil & gas and grains commodity. Australia stands to benefit quite a fair bit as an old world economy rich in mineral resources and arable land with a relatively tiny population.

In a recent media release from the Reserve Bank of Australia dated 1 April 2008, Governor Glenn Stevens, expresses the RBAs view that they expect a further rise in Australia's terms of trade. (Terms of Trade = Prices of Exports / Prices of Imports, hence Australia being a large exporter of commodities to hungry, growing nations, they expect a rise in the terms of trade.)

What's scary about this is that supply for iron or oil in the form of new iron ore mineral deposits or easily extractable oil wells are not in the pipeline, so to speak. In fact they're not even anywhere near the pipeline. Apparently, back when prices were low, we did not go exploring for these things, now that there's a demand again, exploration companies big and small are scrambling to find a lucrative node. Much of what's extractable however is in remote, farflung places. Sometimes located below nice pristine rainforests for example.

The same thing is apparently going on with food prices. We're now witnessing a market in disequilibrium as suppliers scramble to shift supply in response to a larger than anticipated demand.

Reuters.com is doing a special feature on rising food prices: "Agflation: The Real costs of Rising Food Prices"

The UN fears that if food prices continue to escalate, we're going to see more civil unrest. So where's the demand coming from? China and India mostly. But let's not forget to mention that farming isn't instantaneous, it takes time to produce that grain of rice, wheat, sorghum. It takes time to grow that chicken, sheep, cow. There's always a lag in supply response.

Also, let's not forget the market inefficiencies that government rules and taxes impose on prices. Prices are not going to smoothly adjust, they'll be sticky.

I got to thinking about the kind of trends that we can invest and trade on: I'm long emerging markets, so with the rise in incomes and wealth of the average citizen, then we can expect them to consume more meat, vegetables, milk, consumer food products etc. With the need to feed more people, basic inputs have to be increased as well. Stuff like fertilizer, feedstock, feedgrains, acreages etc. 

In the mean time, I guess we as consumers have to put up with higher prices. Nothing comes for free, that's the price of progress. 

From my C++ journal: Why its easier to think of the programmer as a runesmith

Not sure how much programming gets done by analysts these days but judging by the way programming and algorithmic trading is progressing, it won't be long before knowledge of a major programming language would be a major plus point in the recruitment process.

Here's a page from one of my lecture notes on why I think programmers are best seen as modern- day runesmiths.

Should Ebay sell Skype?

Over at FT.com, "Ebay considers sale of Skype subsidiary," says Richard Waters. 

From the article:

Ebay will consider selling off its Skype internet phone subsidiary at the end of this year if it fails to find ways to use the fast-growing service to support its core e-commerce business, according to the company's chief executive.

The comments from John Donahoe, who took over at the end of last month, are the most direct indication yet that Ebay is thinking of scrapping the ill-starred acquisition. It paid $3.1bn, but wrote down the value of the business by $1.4bn last year after concluding it would not match earlier hopes.

Tech geeks at slashdot.org are divided: 1) purchase of Skype didn't make sense (Skype = internet telephony service, Ebay = auction/ecommerce site, so where's the fit? 2) Ebay CEO's being short sighted, Skype makes perfect strategic sense. So why's he thinking of selling a growing business with a great future?

Ebay's blog (http://ebayinkblog.com/2008/04/18/john-donahoe-talks-to-ebay-ink/) on the other hand reports the following:

Before we jump into the original conversation, however, I wanted to make sure I addressed a timely and critical discussion that has been given more fuel by a Financial Times story, that ran on the heels of the earnings news this week, that I felt needed clarification directly from John. So, the first question and answer below is from earlier today. The rest is the transcript of my conversation with him on March 21. I plan on sitting down with Skype president, Josh Silverman, in the coming weeks to get his take on the future. For now, here is my conversation with John.

April 16, 2008

Q. I read in the Financial Times that we may sell Skype. That if the synergies are strong, we’ll keep it in our portfolio. If not, we’ll reassess it. Is this true?

We have no plans to sell Skype… and why would we? As I said in the story, it’s a great business with a great purpose — enabling the world’s conversations. With a new president, our plan for Skype is to focus on providing the best possible user experience and continuing the incredible growth momentum we’ve enjoyed with Skype for the past four years.
To be clear, I’ve fully supported big investments in Skype, including removing the earn-out, and bringing over some top talent like Josh. I think this business has tremendous potential that we’ve only started to tap. Josh and I are both excited about the prospects … our job now is to make sure we continue to build on Skype’s successes and grow its passionate community of users

Is it me or does it sound like major media damage control are in effect?

I'm of the opinion that Ebay would eventually sell Skype to focus on its core business. Skype's undervalued at the moment, the rational decision is to wait till the market's more appreciative of speculative ventures before selling. Skype offers great service but it needs a better strategic partner.

On Friday 18 April 2008, Ebay closed at USD$31.71 

Ebay's beta:  2.29

trailing P/E ratio: 101. 61

Link to eBay's google finance page: http://finance.google.com/finance?q=NASDAQ%3AEBAY

From boingboing.net: Fruit flies and Free Will

First post at Boingboing.net: Matt sez, "A researcher at my University is working on modeling the behaviour of fruit flies. Turns out they have something like a Free Will, or at least they are not completely random in their flying patterns. Check out the video of drosophila in the flight simulator."

Their results caught computer scientist and lead author Alexander Maye from the University of Hamburg by surprise: “I would have never guessed that simple flies who keep bouncing off the same window otherwise have the capacity for nonrandom spontaneity if given the chance.” Previous studies have shown that in nature, flies do not buzz about aimlessly but forage according to a sophisticated search strategy (this is how they find our wine glasses). The new research now suggests that such strategies arise spontaneously rather than being induced by spatial cues.

Free will is seen in choices. Let's say you're given options A, B and C. Therefore, option A, B and C are pre-determined and offered by Grand Omnipotent Designer, the Unseen Systems Architect, the Super User, God as we know it. But instead of one of those 3 options, you come up and implement Option D. That's free will. The freedom to take on a gamble, and decide on a particular course of action, fate, if you will. It could be that Option D had been all along been pre-determined by God in some massive supercomputing mind of His, but the person knows it not, he has to take a gamble. He has to risk to know, to experience, to encounter and possibly die from the venture. That's free will. Free Will is therefore a Gamble.

Now to study free will, you can either study the aggregate actions of people or study it at the rudimentary basic level. The world of insects for example.

All along we thought Animals are basically ingenious, complex but highly useful robots. Given X, they perform Y; up to a certain tolerance and within a certain scope of operation. A goat can't breathe underwater, nor can a fish fly. But do animals have free will? Do they make choices other than that we offer them? If so how can we say that their choices are not simply random events? How can we imply, from the data, that the actions we see is not an aberrant behaviour?

One of the ways we can do that is to capture the data of movement in flight by insects and apply a statistical function to determine if this action is random or not.

Here's the link to the fruitfly study: http://brembs.net/spontaneous/

Excerpt from article:

Only after the team analyzed the fly behavior with methods developed by co-authors George Sugihara and Chih-hao Hsieh from the Scripps Institution of Oceanography at UC San Diego did they realize the origin of the fly's peculiar spontaneity. Using the so-called "S-Map Procedure" the researchers detected a non-linear signature in the fly behavior. Such a signature can only be found in systems whose indeterminate behavior is not due to noise but originates in their design. “This signature indicates that there is a function in the fly brain which evolved to generate spontaneous variations in the behavior” Sugihara said. “This function appears to be common to many other animals and could form the biological foundation for what we experience as free will”.

Its kinda nice to know that free will exists and that in the end we still have choices in our life. What is wealth, money, brains, beauty and brawn or even good health, if we don't have freedom and the will to use it.

From NYT: "The Face of a Prophet"

George Soros predicts more sorrow (heh) for the US economy. 

He also foresees a time when the US dollar won't be the dominant currency and that it will be a lot harder to borrow money.

I'd like to draw your attention to Mr Soro's market theory, called "reflexivity" in which: 

"... people’s biases and actions can affect the direction of the underlying economy, undermining the conventional theory that markets tend toward some sort of equilibrium. (implied: there's no such thing as equilibrium, everything is flux.)

Mr. Soros said all aspects of his life — finance, philanthropy, even politics — are driven by reflexivity, which has to do with the feedback loop between people’s understanding of reality and their own actions."

To understand and to take action based on one's accurate assessment of present reality - sounds like a Buddhist tenet of seeing the true Reality of things.

To read more: http://www.nytimes.com/2008/04/11/business/11soros.html?ex=1365652800&en=b1e22398ab2726f6&ei=5124&partner=permalink&exprod=permalink

Goldman Sachs Launches Tradeable Index for Longevity and Mortality Risks

This is a finance blog with a penchant for interesting financial market events so rather than focussing on the rather mundane elements of retail insurance brokerage/ financial planning industry, I thought I'll point you towards an article from Business wire. Goldman Sach launched an index in December 2007 which attempts to benchmark a representative population group's mortality and longevity risk.

Permalink to article: Goldman Sachs Launches Tradeable Index for Longevity and Mortality Risks

Link to the index: Qxx-index

From the index site:

QxX.LS index swaps are designed to allow market participants to hedge or gain exposure to longevity and mortality risks, providing reliable, real-time pricing information and execution

Yes, that's right, folks. You can now trade your way to wealth and riches by betting on when the market is wrong on assessing death rates in the population!

Longevity and mortality are the risks that realized lifespan differs from expected lifespan, creating an economic consequence, often a price change in an asset or liability.

Here's the useful bit in what kind of risks your typical insurance provider holds:

Holders of mortality risk -- typically institutions such as insurance carriers and reinsurers -- are economically exposed to a decrease in the lifespan of a pool of individuals

Holders of longevity risk -- pension funds, annuity writers, the social security trust fund or life settlement investors -- are exposed to the increase in the lifespan of a pool of individuals

Hang on, let me get my head around this:

Insurance companies face more risk if the population lifespan is FALLING. Therefore, it is in their interests to KEEP US HEALTHY AND ALIVE on this planet.

Pension funds and Social Security trust funds, (that includes Singapore's Central Provident Fund and Australia's Superannuation Funds) face GREATER RISK if the population's longevity is RISNG.

Does that mean its a good time to invest in general insurance companies like Warren Buffett did considering that we are all living longer?

Financial Planning Dilemma

A good friend of mine joined the financial planning line a year ago. We used to talk everyday but ever since he sleazed up to me one day and said, "Hey, Andy... are you insured?" I've never spoken to him since. My worst fear in life is to be a retail financial planner - cold calling random people, peddling term and life insurance products.

I think the problem with insurance broking is that when you're 20 - 30 years old, thoughts of impending death is as far away from your mind as snow is in the Sahara. You're more likely to encounter such thoughts as you get closer to the terminal end of your life.

Sure, premiums are cheaper when you're younger, but are they really in relative terms? If your income is $2000 a month, and you're setting aside $100 into a policy with NO-growth in terms of returns, other than the fact that at some later age, you can now access all that money - well, its not really the most attractive of options.

We do have the option of buying into an Insurance-Investment Linked Product. You pay $100 a month or so (depends on your age and lifestyle habits really) and they guarantee some form of capital protection and some degree of investment returns as well as general life insurance. (that's not too bad.)

On the other hand, if you're relatively more senior and you're depending on your pension as your primary source of income, buying insurance to leave a little nest egg for the grandkids might not be that optimal choice considering that most of us are living longer and our pension incomes are likely to be lower due to inflation and higher standards of living. 

Never fear, though, if you're of the age, and you're living longer, pinching together some pennies to ensure your grandkids have a little nest egg to carry with them when you're gone might not be such a good idea. 

If you're a reasonably fit, grandpappy or grandna, there should be no reason why the rates can't be as competitive. Shop around. (If you've landed on this blog, congratulations!)

On the internet, there are sites which provide quotes or rates on life insurance. Based on a principal sum to be paid upon death, they'll get quotes offered by general insurers and tell you what your monthly outlay will be like to guarantee payment of X dollars upon death. They don't necessarily sell this products or underwrite them. These sites simply act as gateways for people who happen to land on their page looking for quotes, rate or general financial planning advice.

If you're over 60, and in the market to give something to your offspring why not just fill up a simple, anonymous form and see what kinda quotes they will offer you.

All links are brought to you by the people at profam.com

From Slashdot.org: HighWizard posts "Oil Deposit Could Increase US Reserves 10x"

Occasionally you'll get a gem of a piece posted on Slashdot.org that has academic/trading/investment merit. This article is about the release of a report on the Bakkan Formation. There's lots of good stuff in the following Slashdot story thread.

HighWizard notes the upcoming release, on Thursday, of a report by the US Geological Survey on the Bakken Formation. This is an oil field covering 200,000 square miles and underlying parts of North and South Dakota, Montana, and Saskatchewan. A geologist who began surveying the field, before dying in 2000, believed it may hold as much as 1 billion barrels of recoverable oil. Later estimates have ranged to the hundreds of billions of barrels. Such a reserve would go a long way toward securing US energy independence.

Read more at Slashdot.org: http://hardware.slashdot.org/article.pl?sid=08/04/08/2111201&from=rss

If this is true, which companies are at the Bakkan formation?

Reader Itchyeyes (908311) contributes:

The people that have interests in the Bakken in North Dakota are not the majors. They are companies like EOG, Marathon, Kodiak, and Questar. These companies do not have refineries. They sell at the market price, they have no say in what their product goes for. They do not have enough reserves to make any impact on market prices even if they wanted to.

Also, he gives reasons as to why oil extraction from Bakkan formation is becoming a viable economic alternative due to high oil prices.

Of note is the following rant by Reader iq_in_binary (305246):

You, sir, are a complete fucking moron.

The big oil companies haven't been making their profit by virtue of artificially controlling the supply, they've been doing it by selling more than they've ever sold before. The profits reaped last year and the year previous wasn't because of raising their profit margins (I.E. raising prices to increase their profit margin), they've been doing it by selling more petrol than in any years previous.

Big Oil has has the same business infrastructure, organizational structure, and sales methods as they've had for 50 fucking years. They held a razor thin profit margin on gasoline for going on 25 years now. For every dollar on gas, you spend maybe 3 pennies giving them profit. So quit bitching about oil companies gouging the public, because they aren't. You want to know the real culprit for gas prices these days? Our own fucking government, they make about a dollar per gallon on taxes.

Where does that money go? Who knows any more. Just quit bitching about a company actually doing good business, because for the most part the petrol companies are. They have to deal with literally thousands of different mixtures of gasoline being shipped among this country, the different ways to refine them, and finally the shipping, and they're only pulling 3% profit. Fuck you for thinking that's out of line. Learn your economics, and then learn how the real world works. The price of gas being as high as it is is MORE the gov's fault for spending so much money on pork that it has to rape us on gas to compensate. Bitch at your governments for taxing gas so much, then bitch at them for making good companies spend twice as much as they have to for making a good product, THEN bitch at the gas companies for not making things cheap enough when they're only pulling a 3% margin.

This is a capitalist economy, damnit, it's what is responsible for this country's well-being. Think about the business first, then bitch.

To which, I say, AMEN to that!

From FT Alphaville blog: "Taking a bath - the shape of the downturn to come"

I was looking for ways to visualize the US recession when I came across this post from FT Alphaville: 

Now that US recession is a racing certainty, the debate has moved on to the shape of things to come.V-shaped, good: a short, sharp downturn with a speedy recovery. Those who were last year telling us that all was enduringly rosy have tended to move towards this letter of the alphabet in describing the forthcoming downturn. W-shaped: a double dip. U-shaped, or Martin Sorrell’s bath-shaped or even saucer-shaped variant: a more protracted period spent at the bottom.And most feared of all, the Japanese influenced L-shaped recession: a lasting period of stagnation, bordering on economic depression.

Summary: L, U, V, W, bath and saucer shapes. 6 economic downturn shapes to remember prior to purchasing stock.

To read more: http://ftalphaville.ft.com/blog/2008/04/08/12137/taking-a-bath-the-shape-of-the-downturn-to-come/

Real Options Spreadsheet in action: Foresight.co.uk "Exploiting the Electromagnetic Spectrum"

Foresight.co.uk is the British government's efforts at tracking, spotting and managing technological and scientific development. To value the cost and benefits of 'Exploiting the Electromagnetic Spectrum' they used Real Option Theory and tasked University of Manchester to develop a spreadsheet to calculate option prices of completing certain project milestones.

Link to the main page: "Foresight Real Options Model"

Link to the PDF Manual.

Link to the Option Calculator (Excel Spreadsheet).

Crack open the PDF manual and they'll explain clearly what all the cells do and how they relate to each other. Very insightful if you are thinking of developing a Real Option spreadsheet of your own.

Need a free C++ textbook?

One of the pre-requisites of NTU-CMU's MSc in Financial Engineering is a module on C++ programming. Rather than buying a book (that's cos I am broke) I thought I'd see if there's a downloadable ebook out there.

I found one at: http://www.mindview.net/Books/TICPP/ThinkingInCPP2e.html "Thinking in C++" by Bruce Eckel. It was recommended at the Codeguru.com forum.

I haven't started reading it yet but I'll post a review by next week.

From NYT: "To See a Stock Market Bursting, Look at Shanghai"

About time this happened.

A whole bunch of comments were made by shellshocked Shanghainese investors which reminds me of what survivors of the NASDAQ crash of 98-99 said:

Suddenly, millions of small investors who were crowding into brokerage houses, spending the entire day there playing cards, trading stocks, eating noodles and cheering on the markets with other day traders and retirees, are feeling depressed and angry.

"These days my family quarrels a lot," says Zhang Liying, 55, a retired hotel waitress who with her husband invested all their savings in the stock market. “My husband asked me to sell; I wanted to hold for a while. Now my husband condemns me as so stupid that we lost our family’s savings.”

Si Dansu, 68, and a retired engineer, is even more distraught, but she blames the government.

“I devoted my whole life to the country. I went to the countryside after graduation, and worked as an engineer in a Shanghai factory until retirement. I invested almost all my savings and retirement fund in the market 10 years ago. But now I’m totally penniless. All my stocks went down.”

Other parts of Asia are as bad, or worse. In India, stock prices have plunged 31 percent in Mumbai; they are off 31 percent in Japan and a whopping 53 percent in Vietnam, another booming economy. Angry investors have burned a securities regulator in effigy in Mumbai, and some are in tears in Ho Chi Minh City, Vietnam.

“Some of them have cried,” says Nguyen Quang Tri, 74, a retired cement company manager who was visiting a Ho Chi Minh City brokerage house this week. “I have my own equity, but most of the people here borrowed money from the bank.”

Shanghainese were hoping that the Chinese government will not allow the market to fall months before the Beijing Olympics.

My next prediction is that Irrational Exuberance will be translated into Mandarin and swing back to the top of the Must-Read Investor Education books in China after this incident.

To read more: http://www.nytimes.com/2008/04/02/business/worldbusiness/02yuan.html?ex=1364788800&en=9037453730135cb6&ei=5124&partner=permalink&exprod=permalink

Blog entry from: Paul Wilmott's Blog

From Paul Wilmott's Blog: "Science in Finance VIII: The Maths Sweet Spot"

Maths is fun. Many people reading this blog and the Forum get a real kick out of maths and problem solving. I’ve had many jobs and careers in the last three decades, and started various businesses, but the one thing that I keep coming back to is mathematics. There’s something peaceful and relaxing about an interesting maths problem that means you can forget all your troubles, just get totally absorbed in either the detail of a formulation, calculation or solution, or lie back and think of deep concepts.
I wonder if that’s one of the reasons quantitative finance is in such a mess.

I’m going to let you in on the big secret of quantitative finance, and you must keep this secret because if word got out then that would be the end of all masters in financial engineering programs. And universities make a lot of money from those.

Ok, the big secret...Quantitative finance is one of the easiest branches of mathematics.

To read more of this post: http://www.wilmott.com/blogs/paul/index.cfm/2008/4/1/Science-in-Finance-VIII-The-Maths-Sweet-Spot