Dan on January 20th, 2015

Over the past weeks as I read the predictions for 2015, I have been mulling different points of view about where interest rates are headed in 2015.  I think I have made up my mind that interest rates will be heading lower in 2015.

This chart as highlighted in this Business Insider article is rather telling:

10 Year Interest Rate Comparisons


Looking at this chart, the yield on the 10 year US Bond (the white line) appears out of line with the other primary developed countries. If you believe the US economy will stay the course in 2015, in comparison to its foreign peers, you would expect the US yield to be closer to the others.  Interestingly, given Japan’s debt problems, the Japanese debt also appears to be mispriced;  .03% seems awfully low for a country with the highest debt load of any country – investors in Japanese bonds seem confident that they will get all of their money back in 10 years. I would not be that confident.

So how low will interest rates go?  After all, they are almost at 0% now.  Well, we are in historic economic times – and negative interest rates are spreading.  Look at this price chart of German Bund interest rates:


The Swiss Bond Index is also negative, so its not inconceivable that US Bond yields could go negative this year.  So conventional wisdom was rates have nowhere to go up – but this shows how we are in very unconventional times and it may be time for unconventional thinking.

Dan on January 14th, 2015

I ran across this post regarding the increasing risk of deflation, and this chart caught my eye:



It is interesting to me how this shows clearly that as Quantitative Easing has winded down in 2014, the inflation that the Fed was manufacturing immediately died down.  So that got me thinking, is deflation such a bad thing?  Why has the government used such a historically drastic strategy  to try to spark inflation and avoid deflation?  On the surface, it would seem to me that deflation is a good thing for savers and workers ( wages typically do not keep up with inflation).  If you have huge debts (like the government)  deflation would be a bad thing as it makes your debt more expensive.

So I did some searching and found a couple good arguments on whether deflation is good or bad.   First up, Paul Krugman had a good article on why he thinks deflation is bad.  He gives three reasons why deflation is bad – I would encourage the reader to read the article and decide if the arguments make sense.

I also found this article covering how there is good deflation and bad deflation.  The article makes some of the same points as the Krugman article, but covers some different scenarios.

In reading these articles, I guess I haven’t made up my mind if deflation is good or bad. Arguably in late 2008 and 2009 we were on the brink of bad deflation due to the high household debt and drop-off in economic activity.  However now, it appears that the dropping oil prices and productivity improvements hint at ‘good deflation’.

I am going to keep mulling this whole issue over in my mind for awhile.  Because looking at the above chart – good or bad – it looks like we are about to be hit with a dose of deflation.


Dan on January 5th, 2015

I was amused when I saw the ‘curious’ call in the Dallas – Detroit NFL playoff game that has garnered so much attention.

It seems to me faceguarding a player is one of the standard pass interference calls  to be made, and this looked like a textbook example.  So it was odd that even after the flag is thrown and the penalty is announced, the call gets reversed.

This article has a good recap of the events in case you missed it.   This play seemed to me the biggest playoff robbery since the mysterious interception that was overturned in the 2006 Pittsburgh – Indianapolis playoff game.   Interestingly enough, both of these legendary calls were made by Referee Pete Morelli.  This from 2006:

The league acknowledged Monday that referee Pete Morelli erred when he overturned on replay Polamalu’s interception of a Peyton Manning pass Sunday in the playoff game between Pittsburgh and Indianapolis.

That puts it mildly – that 2006 reversal was the worst call reversal I have ever seen.  So it interesting that Pete Morelli and his officiating crew  is in this latest controversy.  Its not like his calls have gone unnoticed over the years.  I stumbled across this article by a fan who did a review back in 2006 of games that Morelli has officiated, and the results weren’t flattering.

This excerpt from the 2006 review of Morelli’s crew:

Based on my grades this crew got two lukewarm passes and a failure. If I was a coach preparing for this crew, I would expect an even game called on the offensive line, I wouldn’t expect to be able to get a cheap pass interference call on a deep ball, I would expect some type of replay screwup, and I would be wary of having a penalty called on my team at a critical fourth quarter moment.

This officiating crew is not the best the NFL has. So why does the NFL continue to choose this crew for playoff games?    Perhaps they are taking a queue from Reality TV.  Fans of reality TV know that the shows are edited to build the best story line and build characters – they are not edited to provide a even handed journal of events.    The NFL is at the height of its popularity, so the NFL must be doing something right.   And the Dallas Cowboys – America’s Team  – is headed to the next round of the playoffs.

If you are an investor in Nordstrom (JWN) you should take a look at the December 2014 Investors presentation they released.  The chart from that presentation that got me thinking was this one:

nordstrom growth

Nordstrom’s is gaining traction on selling clothing online.  Nordstrom seems to have built the best of both worlds – with free shipping and their reputation for liberal return policies, they have given the consumer the ‘in-home dressing room’.

Business Insider also just ran this article discussing what Nordstrom is doing right.  So I wonder – who is  their biggest competitors in the online space?  There are the super high end retailers – i.e Tiffany’s and Nieman Marcus, but they don’t have the mass appeal as Nordstrom.  On the other end you have Macy’s, Target, and Amazon, who I don’t believe they draw the same class of consumer. So I think they have built a pretty decent spot fort themselves in clothing- a unique combination of online presence, customer service image, and brick and mortar stores.

Investors are taking notice – the stock is up 120% in five years, and is currently pretty richly valued.  But if you are a long term investor, or  if we see a pullback in their stock price,  I think Nordstrom is a company to consider for your portfolio.

Dan on December 21st, 2014

Thinking more about this recent drop in oil prices caused me to do a little more poking around the internet, and I came across the December 2014 OPEC Oil Report.  I must admit I haven’t read any of these reports before, but it is full of interesting economic graphs and worldwide economic data  (Click here to download the pdf).

In case you don’t want to read the whole report, below I have pulled out my favorite graphs which do a pretty good job of summarizing the whole oil situation:





Note that from the charts above, the world is awash in oil thanks largely to increased US Production.   Demand for oil is expected to increase by 1+% in 2014 and in 2015, but supply is outpacing the demand.  OPEC is doing the rational economic response to this;  lowering production to increase prices will only sell more US Oil.  The OPEC cartel is broken – after all these years there are now too many other players.

Business Insider showed this great chart about break-even prices by oilfield.  This again shows it’s in OPEC’s best interest to squeeze the higher cost producers out.


World Oil Field Break-Even Prices (click image to expand)

So it looks like low oil prices might be around for awhile –  looking at the chart above one would think the floor would be in the $50 – $60 a barrel range.  Or assuming technological advances, maybe lower – throwing a huge curve ball to the worldwide fight against deflation and the assumption of constantly rising energy prices.

Dan on December 17th, 2014

I just posted an updated report on eMagin on Seeking Alpha.


  • eMagin is moving forward on the great consumer OLED opportunity.
  • Can eMagin execute, or will it be another disappointing year?
  • Financials improving, but still too early to be bullish.

Check it out at  http://seekingalpha.com/article/2757795-will-emagin-turnaround-in-2015.

Dan on December 12th, 2014

I have been vacillating on whether or not to post anything on the torture report – after reading all the articles and opinions I hadn’t really been able to solidify my thoughts into a post, and I didn’t want to write something that was just an enraged outburst against our government.  I finally decided to break down and do this post after reading this article:


The author makes a number of points that resonated with me.  However, there is another thing that keeps bugging me.  I was surprised to see the  large number of politicians and media commentators are willing to overlook the atrocities because they may have gathered information that saved the homeland.  Plus, John Brennen, director of the CIA, refused to rule out future use of these techniques.

Fine.  If this argument is to be used to justify possible future use of these actions, then we need to expand these programs.  Why should we limit these effective(?) techniques to foreign terrorists?  Shouldn’t we expand Enhanced Interrogation Techniques for use by the FBI and State and local police departments?  When or why is it not appropriate to torture domestic terrorism suspects, or radicalized associates of domestic murder suspects if it could lead to gaining information to prevent future crimes against the State?  The same argument should be made for the drone program.  Any domestic resident suspected of conspiring to commit murder should be subject to the same death-by-drone guidelines used to suppress foreign terrorism.

I would argue that the similar techniques used by the NSA and exposed by Edward Snowden should be enacted on domestic soil, but I think most Americans would agree that it is likely already the case.  But we should formally disclose it.

If this great nation wants  to repair the damage to our alledged moral authority to the rest of the world,  I see it as we have two options.  Prosecute the leaders (at the highest levels) of these programs as enemies of the state, or formally adopt these policies for domestic use.  At least then America would be morally consistent.

Dan on December 6th, 2014

For you political junkies, a couple amusing looks Washington press briefings.

This article on Business Insider reveals the political theatre at the State Department. The State Department spokesperson had a prepared line when asked about the Egyptian government’s decision to clear Hosni Mubarak of murder.

While the White House press gets a lot of flak for just being the mouthpiece for the government, in this case it was interesting to see some real pushback on the  prepared response the State Department had.  It is also curious that the State Department refused to condemn or defend this – its likely something in the US’s interest, but  not defendable.

Alas, at the end of the clip, when the lights go down, the actors speak the truth and you hear the spokesperson joke with a press member that ‘that Egypt line is ridiculous’.



The other humorous White House press story of the week was the White House spokesman trying to defend the appointments of new ambassadors to Argentina and Hungary – courtesy of the Daily Show:


When asked why these apparently unqualified candidates were appointed ambassadors, the spokesman had a tough time responding. Finally rather than admitting it was because the Argentinian ambassador had raised $500,000+ for re-election, and the Hungarian ambassador $1.4 million, his response was basically ‘it wasn’t my decision’.

Given the current quality of shows on cable TV – I may have to start watching more press briefings.  Reality TV at its best.

Dan on December 3rd, 2014

A lot was written in 2008 about the moral hazard of the federal bailout of the banks and financial institutions during the great recession.  Then Treasury Secretary Henry Paulson was quoted  as saying 

the Fed made “the right decision” and expressed “great confidence” in its chairman, Ben Bernanke.  Paulson said that in the case of Bear Stearns, the risk to financial stability outweighed his concern about so-called moral hazard, in which investors come to expect government rescues.

I was reminded of this when I read this interview with hedge fund manager Hugh Hendry.  A self confessed bear who capitulated in the wake of central bank intervention.  The full interview can be read here, but this was what I thought was his most important point:

I have concluded that my risk tolerances were too taut and it was creating too much of my own intervention, in the portfolio, and it was damaging to the client’s performance. So I’ve pulled back or I’ve widened the tolerance of the portfolio.

Merryn (Interviewer): So your basic point here is that if the central banks have your back, there’s no need to have the same kind of risk controls that you used to have.

Hugh: There is less need. Less need. I tell you, I was at a conference with some of the great and the good global macro managers in September in New York and I asked them all the question, “If the S&P is down 12% what do you do? Are you selling more or are you buying?” Guess what? They’re all buying. So the central banks have created a behavioral tic which is becoming self-reinforcing and I believe we saw another manifestation of that behavior in October.

We have seen government/central bank intervention in the US, we are seeing government intervention in Japan, and we are about to see it in Europe.  Yet nobody is talking about the moral hazard this presents and, according to Hugh Hendry, is leading to a widespread increase in risk taking in the financial community.

Dan on November 16th, 2014

Speaking of Russia (in my last post),  it was interesting to see Jim Rogers view on Russia in this interview on Business Insider.  Jim Rogers has been a long time staple of the financial news channels, and he is the first one I have heard state an alternative view of Russian Relations.

As a long time commodities trader and Asia investor,its interesting to see his take on whats going on in Russia.  He also is one of the few to link the suddenly falling oil prices to geopolitical pressure on Russia:

It’s [The recent drop in Oil Prices] a fundamental positive for anybody who uses oil, who uses energy. It’s not a positive for places like Canada, Russia, or Australia. It seems to me that this is a bit of an artificial move. The Saudis, from what I can gather, are dumping oil because the US has told them to in order to put pressure on Russia and Iran. 

Interestingly, another recent article discusses the effect of this drop in oil prices on various governments over a 4 quarter to 12 quarter time period.  This chart:

shows Jim Rogers analysis of the oil movement does not seem too far fetched.  Conventional Market wisdom would have you think oil prices should be strong given worldwide economic strength – so maybe something else is going on here to put the squeeze on Russia.