And this year’s Darwin Award goes to …

by Dawn Pennington on April 16, 2014

This guy.

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Anybody remember Facebook (FB) credits?

*crickets*

That’s what I thought.

Anyway, it was an interesting idea to encourage the free-game-addicted set to pony up a couple bucks here and there to feed their Angry Birds and Candy Crush habits.

Of course, if you’ve ever purchased a gift for someone through Facebook (I received a lovely box of chocolates for my last birthday, and sent a couple of gift cards to old friends to celebrate some milestones they had posted about), you know that you can just pay for those directly with your credit card. No credits needed.

But Facebook’s foray into payments has gone a bit farther, as the Financial Times reports company is “weeks away” from being able to store and exchange money via its platform in Ireland.

According to Ireland’s central bank, this currency would be valid across Europe through a “passporting” process.

I can’t say I’ve ever been anything more than skeptical of Bitcoin, so this makes me a bit wary.

But I admit, I’m intrigued.

After all, if you look at the money centers and “payday lenders” throughout the U.S., it’s not a bad business to be in.  You don’t hear much about names like Western Union (WU), EZCorp (EZPW) and Cash America (CSH) anymore. But generally, these places really don’t need to advertise. Those who need to take advantage of their services, know exactly where to find them.

Plus, I think until we get the immigration situation figured out on Capitol Hill, we’ll still see a lot of money being sent abroad to family members who aren’t able to travel to the U.S.

However, the idea of being able to travel through Europe without having a lot of cash in my pocket holds a lot of appeal.

I do think PayPal will be the biggest winner (EBAY) in the portable/passportable/online currency game. I’ve noticed PayPal is accepted at Dollar General (DG) stores although I can’t imagine standing at the terminal and typing in my info when I can just hand over a debit card.

If eBay/PayPal and Facebook can come up with an app like Starbucks has, where we can truly go “cashless” thanks to the ability to scan our Gold Cards on our phones, I think whichever company comes to market with it first will be a huge winner.

Of course, as we say around these hallowed halls at Uncommon Wisdom Daily, it’s not the company that’s first to market that you invest in. Generally, it’s the company that waits for the technology to arrive, and then improves it tenfold, that’s worth the bet.

Bottom line, be sure to thank Bitcoin as the door hits it on the way out, for opening up a virtual payment world that could reward investors far, far better … and with far less risk.

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Lampert’s end?

by Dawn Pennington on April 14, 2014

Recently Sears Holding (SHLD) spun out Lands’ End (LE). But did it really? The stock was spun out at $32 a share and is now trading at $26 a share. Sears paid $1.9 billion and is now worth $840 million. Yikes! Read more here …

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Scientists Face Off on Climate Change

by Brad Hoppmann on April 8, 2014

These are comments from two readers, chemist Sergio and mathematician Greg, in response to my Apr. 7 afternoon article, Climate Change: Scientific Non-Consensus.

Please add your own comments, pro or con, in the comment space at the bottom of this page.

***

Hello Brad,

Your characterization of the attitude of scientists is poorly worded . A much more accurate representation is as follows:

A large majority of scientists with impressive credentials say humans are causing global warming/climate change. According to them, we must change our ways or prepare for the worst.  [in the paragraph above this statement you did say that the group is large - why change it to the improper characterization of "some"??]

A few other scientists with equally impressive credentials tell us global warming/climate change is real, but it is perfectly natural and not manmade.

A very small minority of impressively credentialed scientists say the available evidence doesn’t prove anything either way, and that the other scientists must have abandoned the scientific method for political reasons.

With this characterization, it is obvious that there is a scientific consensus that global warming is real and that humans are significantly contributing to it.   Just make a pie chart of it!  If you FAIL to realize that the number of scientists in the last group is a very very small minority, then you are confused.  Science is operating correctly in this arena:  a small minority can air its views and be heard, but this group is so small that it does not destroy the consensus at all.

Here are some numbers:   97% of climate scientists agree that climate is warming and 97-84% agree that change is human caused:

https://www.skepticalscience.com/global-warming-scientific-consensus.htm

http://climate.nasa.gov/scientific-consensus

The NASA site contains a list of scientific societies that agree that there is this consensus.

http://en.wikipedia.org/wiki/Surveys_of_scientists%27_views_on_climate_change

Note that there are several surveys and publications addressing the % of the science community’s belief on the two critical points.  Note that there was more doubt in the earlier periods, before 2004.  Here’s a picture of the modern >2004 consensus in the scientific community that studies climate:

clip_image002

The latest study, published in 2013 states:

In their discussion of the results, the authors said that the large proportion of abstracts that state no position on AGW is as expected in a consensus situation,[22] adding that “the fundamental science of AGW is no longer controversial among the publishing science community and the remaining debate in the field has moved on to other topics.”[21]

In the science community that publishes work in climate science, there IS no controversy, and the consensus is overwhelmingly accepted.  The general public is a little behind in realizing this.

I’m afraid many people are not willing to admit that the naysayers are the people with the political agenda, not the rest of us scientists who are genuinely concerned about the future of our planet and the quality of the air we breathe.  The naysayers are the ones propagandizing the presence of the last group in order to confuse people. How many of the naysaying republican congressmen are scientists?  Those naysayers are clearly on the take to have these views.  The bad part about it is that they are being successful – ordinary people are confused, but they needn’t be at all. There IS a valid  consensus.

We are making progress in understanding the hiatus in warming of the past 5 or so years – warming will resume and our models will soon be able to account for it.  Just consider this one little piece of evidence: if you take out the human made CO2 introduced into the atmosphere, then our climate models produce a hugely discrepant temperature profile for the planet – much cooler than it actually is.  The error in that direction is much greater than the present error in predicting warming with the CO2 production when the temperature has stayed fairly constant in the past 5 or so years.  This demonstrates that CO2 IS driving the warming of the planet.  Also consider that only the average temperature has not increased as much as predicted by the climate models, but that the number of hot record days and their temperatures HAS continued to increase throughout this period.  When I wrote to you last time, I mentioned the recent discovery (which the atmospheric scientist you quoted does not seem aware of) that the hiatus is caused by a strengthening of winds over the Pacific Ocean, and that such is not expected to continue on forever, bringing back the average warming trend.

As time goes on, we understand the dynamics of the atmosphere better and better.  The consequences of being on the wrong side of this issue are catastrophic for humanity.

Sergio A.

 

***

Brad,

I appreciate the opportunity to respond to the discussion invite.  As a mathematician, I look at this in very simple terms.  First, what is a model?  A model attempts to describe a behavior of a system.  For example, the way a small car reacts to a large car in a crash for example.  Another example would be a “description” of a system, or the way things are.  A simulation is the running of the models using differing variables for such things at water vapor, wind, CO2, Nitrogen, etc.  These models can be extremely complex and the numbers of variable equally complex.  Someone has to apply certain weights to each of the variables in the model and then run the simulation to see the results of the “climate.”  This is why they use supercomputers to run these simulations because they are so complex.

A few points to note –

What are the two (2) largest variables that affect climate, but are not in any meaningful way included in the models?  Well, they are volcanoes and the SUN.  You cannot predict volcanic activity, the severity, amount of ash, or the frequency of occurrence.  Likewise, you cannot predict sun spot activity, the severity of it nor the frequency of it.  We just had an unusual eruption on the sun last week, but no one here on earth predicted it would occur.  It affected our satellites and likewise our climate.

Separate example -

Coke has a formula for their soft drink, which is locked up so no one can get it.  Any chemist worth his salt can tell you precisely what is in Coke, but he cannot reproduce the same tastes of Coke regardless of how he mixes the ingredients.  Why is that?  Because there is a process of combination that he doesn’t understand, which is why he can’t reproduce the exact flavor of Coke.

The same would be true of the climate.

Let’s assume that man could devise a model via simulation runs which “accurately” predicted the climate, what would that make him?  It clearly would make him God, because he would know the “secret sauce of combination.”

Few more examples -

Every year during hurricane season, NOAA attempts to predict the path that hurricanes will follow.  How do they do this?  They use models.  If you go to their site during hurricane season, you will see differing projected paths for the hurricane.  Why is that?  Because they don’t know.  Different models show different results.  As they hurricane gets closer to the coast, the models become more accurate, but off in the Antilles, they haven’t a clue.

We have far more data on hurricanes, how they start, what causes them, their patterns, intensity and the like.  However, we cannot predict worth a wit how many we will have from year to year, five years in advance, 10 years in advance, etc.  They are more destructive to lives and property than “climate,” but we can do it.  In this scenario, we’re just trying to model one event, not the PLANET.

Atmospheric gasesAre the guys who presumably predict what the climate will be like in 20 years a special breed of “weathermen?”  Weather is the “art” of trying to model/predict what will happen over the next day, week, month, etc.  Climate is over a much longer span of time, so it necessarily follows that the predictability diminishes the further out you go.

I’m also attaching a breakdown of the atmospheric gases.  CO2 is a mere 0.035% of the atmospheric gases.  It strains credulity to say that even if we took it to 0.08% or more of the atmospheric gases, that there would be hurricanes, floods, polar ice caps melting, diminished sunlight, etc.  If that were the case, then the earth is a very fragile planet and we need to start our evacuation plan now.

What is going on in the climate debate today is politics, but too long to speculate here.  How many scientists disagree with Einstein’s theory of relativity?  I can’t name one and like you not either.  Science isn’t an “art” where you get 51 to say it is X and 49 say it is Y, so the X’s have won.  That is just silly, but that is what they’re trying to say.

A doctor has a license to practice medicine.  We know more about the human body and have been studying it longer.  Yet, every week, month or year, some study disputes some long held belief in medicine.  The FDA approves a drug and says it will cause no harm, but 5 or 10 years later they take it off the market because it caused harm over time.  All thought it was “settled science” when approved.

There are just a plethora of examples of the lunacy of the global warming and manmade climate change crowd.

Lastly, let’s assume the evolutionists are right and the earth is at least 1 million years old.  We’ve been studying climate for 200 years at the most, so that represents .02% of the age of the earth.  These guys are building models based upon data that represents .02% of all available data (excluding volcanoes and the sun).  The more I think about it, the more daunting and impossible their task is.  Studying the earth’s core samples provide points for speculation – not fact.

greg

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So How Does Your NCAA Hoop Bracket Look?

by Dawn Pennington on March 29, 2014

This just in from Geoff Garbacz …

What does March Madness (and bracketology) have to do with making winning stock and option picks?

The answer — it has everything to do with making winning trades.

First, how many of you thought when you made your picks for March Madness that you would get all 63 games correct? I hope nobody expected to get all games correct. In fact, the odds were 1-in-128 billion.

Only one person in all the major media websites got the first round 100% correct. In the second round, that person went down in flames, losing six out of 16 games. By Saturday night, there were no perfect brackets in Warren Buffett’s pool.

The point of these statistics is to show that no one can predict an event with 100% accuracy. No one makes recommendations on stocks or options with 100% accuracy.

In fact, to beat the S&P 500, a money manager typically needs only be correct 55% of the time. We call this the “batting average.” Managers who push above 60% are typically the “best of the best.”

To compare, our two option services have batting averages of 78% and 82% respectively. Our stock service has a batting average of 70%. As you will see, there is a method to our ability to produce such numbers.

One stat I like to pay a great deal of attention besides the batting average is the “average return per recommendation.” I also watch how many losing trades happen in a row, i.e. “drawdown.”

For me, I know that once or twice a year in my two option services, there will be a streak of three losers in a row. For whatever reason, bad trades for me seem to come in three at a time.

The good thing is that I know this fact, and make adjustments when it happens. I cut back on my trading and assess what is going on.

So How Does Your NCAA Hoop Bracket Look?

Back to the tournament, my favorite team in March Madness is the Wisconsin Badgers. Why? First, I live in Madison, Wisc., home of the Badgers, so it is hard not to be a fan. Second, the coach of the Badgers is Bo Ryan.

He is a journeyman coach who plugged away at the Division III level for 15 years before moving on to University of Wisconsin-Milwaukee for two years until he landed the head coaching job at the University of Wisconsin.

As a Division III basketball player (Gettysburg College), I would have loved to have played for Bo, as he has a passion for the game as well as for the numbers.

More to the point, Ryan only recruits players who can graduate from the University of Wisconsin. Bo is also known to pass up on a player who has overzealous parents. He is the real deal.

Over the weekend, a friend of mine sent me an article written by a former player of Bo Ryan’s (Jay Cheezy) entitled, The Secret Behind Bo Ryan’s Consistent Success. Much of it relates to understanding basketball statistics.

Improve Your Trading Game with What ‘Bo Knows’

With his 702-233 record (0.759 winning percentage), maybe we can learn something from Bo’s process and apply it to picking stocks.

Jay Cheezy wrote, “Bo’s philosophy is grounded upon doing whatever gives him the highest percentage chance to be successful.” When you are trading or investing, it makes sense to set up for success instead of failure.

This means buying stocks of good companies and shorting stocks with bad business models. Do not buy stocks with a poor chart and short stocks where the chart is bullish!

How many times do analysts, mutual fund managers and individual investors try to pick a bottom on a poorly run company or a top on a market leader? Set yourself up for success.

Cheezy goes on to state, “To monitor his team’s efficiency, Bo looks at points per possession. Every practice a student manager stands next to Bo with a clipboard and tracks this statistic.

“The top seven or eight players in his rotation make up the first team. The remaining players are relegated to the scout team, a team emulating the plays of whatever opponent is next on the schedule.

“The first team must score over one point per possession, while also holding the scout team to under one point per possession. If the first team fails to accomplish this after about 20 possessions, they run. Then they play again.

“If they cannot correct the discrepancy, they run again. Repeat as necessary.”

One thing I pride myself on doing is analyzing every recommendation I make AFTER THE TRADE IS COMPLETE.

What did I do right? What mistakes did I make? Lazy traders do not analyze their actions.

Make the Adjustments. Repeat as Necessary.

Cheezy further notes, “Bo has compiled a lot of data in his 30 years as a head coach and analyzing trends can help a coach succeed over time. Time has also given him the opportunity to develop a skilled basketball intuition.

“The Heath brothers point out in their book Decisive: Intuition is only accurate in domains where it is carefully trained. To train intuition requires a predictable environment where you get lots of repetition and quick feedback on your choices.”

College basketball requires lots of good, quick decisions by the coach and his players. In a similar vein, trading requires the ability to make good quick decisions where patterns are discernible due to paying attention to the repetition.

Intuition is only accurate in domains where it is carefully trained.

So what can we learn from Cheezy’s article?

  • First, set yourself up for success not failure.
  • Second, make adjustments when on the battlefield whether it be a basketball court or a trading desk.
  • Third, your intuition (gut) is only accurate when you train it carefully for a specific domain.

Ask yourself if you have the discipline to do the above. If not, then find someone who does and ask them if they are set up for success, make adjustments when needed and use their intuition based only on careful training.

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All right, I admit I went a little overboard on my post title. But please allow me to push my stepstool up to my soapbox for just a moment.

If the fact that King Digital Entertainment’s (KING) initial public offering, priced at $22.50, saw shares dip below $18.50 right out of the gate is a surprise to you, please promise me:

1. You will look at Zynga (ZNGA) and KING and walk away from the computer. For an hour. At least.

2. You will never ever never ever invest in social media start-ups.

2a.  You will read Uncommon Wisdom Daily, which sends you new editions every morning and afternoon, before you put a dime of money to work in this or any sector.

Now here’s the soapbox part.

Venture capitalists love to throw money at technology.  Give a kid and his buddies a few laptops and a few hundred hours to create an addictive app for the Facebook (FB) set, and pocketbooks fly open. No product? No problem! Just make one and the money will follow, right?

I can’t believe in 2014 I’m typing that.

The good news is, there’s plenty of cash out there to invest in brilliant ideas. The bad news is, Candy Crush and Farmville should NEVER have made the “brilliant idea to invest in” list.

I get that everyone wants to make a quick buck on the hottest fads. And I admit I really wish people were more inclined to invest ethically and really put their money where it will do some good for more than themselves.

But I am a capitalist at heart and I won’t fault anyone for trying to turn their nest egg into a bigger egg. I guess I’ve just seen too many of those eggs get cracked that I feel obligated to put a warning label on the “next big things” because, let’s face it, when parents and grandparents start to catch on, these things cease to be cool.

Unfortunately, their stocks are no exception.

 

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Just when we thought ARMs had no more legs …

by Dawn Pennington on March 25, 2014

So, from the “will we ever learn?” files …

Adjustable-Rate Mortgages are making a comeback.

In case we’ve forgotten the absolute horror that these things cause, remember how many people ended up on the street because they couldn’t afford the interest rates on those loans as they adjusted higher.

(See also: Financial Crisis, Great Recession and Liar Loans.)

However, it’s supposed to be “different” this time around …

“Now, though, financial executives say they are focusing on borrowers with strong credit who are using the loans to take out large “jumbo” mortgages — and not so-called subprime borrowers, who used the loans to stretch their buying power as far as it could go.”

It’s no wonder, really, what with all the talk that interest rates could rise “six months” after the Federal Reserve has officially unwound its Quantitative Easing program. Best-case scenario, we could see interest rates start to pop in mid-2015. So, that’s good news for lenders like Citigroup (C) and Bank of America (BAC), which the article notes are stepping back into the pond that washed away so many consumers and creditors alike.

I doubt this means the “American Dream” will come true, or come true again, for the general population. But for real estate investors, who are increasingly gobbling up properties and being selective with their growing pool of prospective tenants, they might be able to turn these previously nightmarish loans into something that helps them sleep very well at night.

Full WSJ story here.

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In his own version of March Madness, Buffett’s prepared to reward the individual who picks the winner of all the men’s tournament games in the Quicken Loans Billion Dollar Bracket Challenge.

The contest allowed for 15 million people to enter free of charge. Their odds of winning are 100% that Quicken will market its products to them … and 9.2 quintillion-to-1 of having the Oracle of Omaha show up Ed McMahon-style at your doorstep.

However, for the Top 20 “close, but no high-priced cigar” entries, Quicken says it will offer a cool $100K consolation prize apiece.

For our money, we’d rather bet on Rudy Martin’s “Sweet 16″ public companies that are running with (and ahead of) the big boys. I’ve included his chart below, but I encourage you to read the full story by clicking the link.

Have  a great trading day!cotw

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11 dead bankers in just as many weeks

by Dawn Pennington on March 18, 2014

As each new year begins and people start cranking out resolutions that will last them through January and that’s about it, another group assembles its “Dead Pool” … that is, the celebrities who might not see 2015.

If we did that here in the financial field, and if anyone bet on a dozen mysterious deaths during the first quarter of the year alone, there’s a pretty good chance their morbid bet will pay off pretty handsomely … and pretty soon.

Today we learned about the 11th apparent suicide of a financial executive in 2014 alone. Kenneth Bellando, formerly an investment banker with JPMorgan Chase (JPM) and currently with Levy Capital, reportedly leapt from his Manhattan apartment building.

As the linked article points out, Bellando is the fifth suicide linked with JPM this year.

Perhaps the 28-year-old did leap to his death voluntarily. But if you take a look at the list of this year’s casualties, the odds of all of them being suicide are about as likely as me becoming 5’10″ and losing about five inches off my waist in the next half-hour.

*checks*

*pinches baby fat … from 1974*

*laments*

In any case, my friend Kevin Kerr put together this comprehensive list of our distant colleagues who met an untimely fate this year …

1 – William Broeksmit, 58-year-old former senior executive at Deutsche Bank AG, was found dead in his home after an apparent suicide in South Kensington in central London, on January 26th.

2 – Karl Slym, 51 year old Tata Motors managing director Karl Slym, was found dead on the fourth floor of the Shangri-La hotel in Bangkok on January 27th.

3 – Gabriel Magee, a 39-year-old JP Morgan employee, died after falling from the roof of the JP Morgan European headquarters in London on January 27th.

4 – Mike Dueker, 50-year-old chief economist of a US investment bank was found dead close to the Tacoma Narrows Bridge in Washington State.

5 – Richard Talley, the 57 year old founder of American Title Services in Centennial, Colorado, was found dead earlier this month after apparently shooting himself with a nail gun.

6 – Tim Dickenson, a U.K.-based communications director at Swiss Re AG, also died last month, however the circumstances surrounding his death are still unknown.

7 – Ryan Henry Crane, a 37 year old executive at JP Morgan died in an alleged suicide just a few weeks ago. No details have been released about his death aside from this small obituary announcement at the Stamford Daily Voice.

8 – Li Junjie, 33-year-old banker in Hong Kong jumped from the JP Morgan HQ in Hong Kong this week.

9 – James Stuart Jr, Former National Bank of Commerce CEO, found dead in Scottsdale, Ariz., the morning of Feb. 19. A family spokesman did not say whatcaused the death.

10 – Edmund (Eddie) Reilly, 47, a trader at Midtown’s Vertical Group, commited suicide by jumping in front of LIRR train.

11 – Kenneth Bellando, 28, a trader at Levy Capital, formerly investment banking analyst at JPMorgan, jumped to his death from his 6th floor East Side apartment.

 

It breaks my heart that I feel the need to bookmark this entry to be able to update it throughout the year …

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Week in Review

by Dawn Pennington on March 18, 2014

Last week we dispatched our favorite financial reporter to South by Southwest Interactive (SXSW) in Austin, a conference where tomorrow’s game-changing innovations are on display for techies and tech investors alike.

But that’s just a slice of the action. Our intrepid Patrick Watson attended some pretty mind-blowing sessions:

  • NSA nemesis Edward Snowden implored the next generation to “Save the Internet.”

The future is scary and exciting all at the same time, and the trends and technologies heading our way are uncovering brand-new investing sectors with each new day.

Unfortunately, we learned something pretty disturbing this week, speaking of technology and encryption and human error.

Target (TGT) received notification of last year’s massive data breach … two weeks before individuals started having their personal data stolen. Did it ignore the warning or just not react appropriately?

Privacy and protection was also top of mind for Facebook (FB) founder Mark Zuckerberg, who said he called President Obama to share his frustration over the NSA’s violation of its citizens’ privacy. (Seems ironic, given how much FB “knows” about us …)

On the global front, overall it was an ugly week in the markets, with China’s first corporate default and a four-year low in copper. But there were some small rays of sunshine, too:

 

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