Monday, December 23, 2013

Health Care’s Road to Ruin

It is crazy how the largest economy on earth has the highest costing medical system. Aivars Lode

HAVING spent the last year reporting for a series of articles on the high cost of American medicine, I’ve heard it all. There was Fred Abrahams, 77, a skier who had surgery on both ankles for arthritis — one in New York for more than $200,000 and one in New Hampshire for less than $40,000. There was Matthew Landman, 41, billed more than $100,000 for antivenin administered in an E.R. after a small rattlesnake bite. There was Robin Miller, a Florida businessman, who needed to buy an implantable defibrillator for his ill brother, who was uninsured; the machine costs tens of thousands of dollars, but he couldn’t get a price for a make or a model.
Extreme anecdotes, perhaps. But the series has prompted more than 10,000 comments of outrage and frustration — from patients, doctors, politicians, even hospital and insurance executives.
As of Jan. 1, the Affordable Care Act promises for the first time to deliver the possibility of meaningful health insurance to every American. But where does that leave the United States in terms of affordable care?
Even supporters see Obamacare as a first step on a long quest to bring Americans affordable medicine, with further adjustments, interventions and expansions needed.
There are plenty of interesting ideas being floated to help repair the system, many of which are being used in other countries, where health care spending is often about half of that in the United States. For example, we could strictly regulate prices or preset payment levels, as is currently done for hospital stays under Medicare, the national insurance program for people over 65, or at least establish fair price corridors for procedures and drugs. We could require hospitals and doctors to provide price lists and upfront estimates to allow consumers to make better choices. We could stop paying doctors and hospitals for each service they performed and instead compensate them with a fixed monthly fee for taking care of each patient. We could even make medical school free or far cheaper and then require service afterward.
But the nation is fundamentally handicapped in its quest for cheaper health care: All other developed countries rely on a large degree of direct government intervention, negotiation or rate-setting to achieve lower-priced medical treatment for all citizens. That is not politically acceptable here. “A lot of the complexity of the Affordable Care Act arises from the political need in the U.S. to rely on the private market to provide health care access,” said Dr. David Blumenthal, a former adviser to President Obama and president of the Commonwealth Fund, a New York-based foundation that focuses on health care.
With that political backdrop, Obamacare deals only indirectly with high prices. By regulating and mandating insurance plans, it seeks to create a better, more competitive market that will make care from doctors and hospitals cheaper. But it primarily relies on a trickle-down theory of cost containment. The Princeton health economist Uwe E. Reinhardt has called it “a somewhat ugly patch” on “a somewhat ugly system.”
With half a billion dollars spent by medical lobbyists each year, according to the Washington-based Center for Responsive Politics, our fragmented profit-driven system is effectively insulated from many of the forces that control spending elsewhere. Even Medicare is not allowed to negotiate drug prices for its tens of millions of beneficiaries, and Americans are forbidden by law to re-import medicines made domestically and sold more cheaply abroad.
And so American patients are stuck with bills and treatment dilemmas that seem increasingly Kafkaesque. The hopeful news is that American health care spending has grown at a slower pace over the past four years. While that is partly because of the recession, economists say, many credit the cost-containing forces unleashed by Obamacare with a significant assist. Even at that rate, many models suggest that nearly 25 percent of gross domestic product will be eaten up by health care in 20 years. That is not sustainable.
“It’s like a diet you can’t just stop, because it’s starting to work,” said Michael Chernew, an economist at Harvard Medical School. “And remember, we haven’t even lost weight yet, we’re just gaining weight more slowly.”
Many health economists say we must move away from the so-called fee-for-service model, where doctors and hospitals bill every event, every pill, every procedure, even hourly rental of the operating room. Though insurers try to hold down costs by negotiating discounts or limiting reimbursement, this strategy has limited power because armies of consultants now advise hospitals on what is known as “strategic billing”: Losing money from trauma patients? Hospitals can add on a $10,000-plus “trauma activation fee.” Medicare not paying enough for a broken wrist? Add a separate “casting fee” to the bill.
Elisabeth Rosenthal is a reporter for The New York Times who is writing a series about the cost of health care, “Paying Till It Hurts.”
“People in fee-for-service are very clever — they stay one step ahead of the formulas to maximize revenue,” said Dr. Steven Schroeder, a professor at the medical school of the University of California, San Francisco.
Given that national or even regional rate-setting is out of the question, most health economists argue that the nation needs a new type of payment model, one where doctors and hospitals earn more by keeping patients healthy with preventive care rather than by prescribing expensive tests.
Such models exist: A number of hospital and doctors groups engage in so-called capitated care, where they are paid an annual fee by an employer or individual for all patient needs and must work within that budget. The Affordable Care Act promotes a strategy focused on accountable care organizations, in which similar networks can earn financial rewards for figuring out how to save money while meeting standards for good care. But such models are still far from the norm in a country where a majority of physicians are in business for themselves and doctors and hospitals bill separately.
The new law includes a number of incentives intended to nudge doctors, hospitals and insurers to join groups and focus more on value, “but we don’t know how well they’re going to work,” said John Holahan, a fellow at the Urban Institute’s Health Policy Center.
For example, the law will tax premiums for the most expensive insurance plans to keep luxury health care spending down. And Medicare, through a value-based purchasing program set up by the law, is providing bonuses to doctors and hospitals for meeting quality-care standards. But those are tentative steps. In fact, recent research published in the journal Health Affairs concluded that the magnitude of bonuses now offered to hospitals was too small to change behavior, noting that even supermarket coupons tended to offer benefits worth well over 10 percent of total value.
The Affordable Care Act generally requires patients to be responsible for more of their bills — copays and deductibles — so they will become more price-savvy medical consumers. But the deck is stacked against them in a system where doctors and hospitals are not required or expected to provide upfront pricing. Why not? They should tell and patients should ask. (In France, before a hip replacement on a private patient, doctors must sign a contract that includes a price.)
And policy makers need to address two of the biggest drivers of our inflated national health care bill: the astronomical price of hospitalizations and particularly end-of-life care.
Obamacare plans cap an individual’s annual out-of-pocket spending at $6,350 a year. That (happily) prevents bankruptcy, but it also means that patients will still not be very discerning shoppers when it comes to major hospitalizations, since — in the United States — they’ve quite likely surpassed their out of pocket maximum by the time they’ve been formally admitted.
On the private side, some companies and employee health plans are experimenting with new payment models to limit these large bills. They may follow Medicare, which offers hospitals bundled payments for given procedures, or try a technique known as reference pricing, in which they pick a rate they think is fair for a procedure — say $32,000 for a knee replacement, all-inclusive. If a patient wants to go to a hospital with higher fees, the difference comes out of his pocket.
To rein in price increases, companies and insurers have begun offering patients narrower networks, already a major gripe about many Obamacare plans.
And as choices narrow while prices rise, I sense that many patients are no longer so devoted to a market-based health care system. Barbara Felton, 86, was “shocked” when she saw her $12,000 itemized hospital bill for a recent brief stay to repair a fractured femur in Pocatello, Idaho. “I’ve never been in favor of a single payer before, but now I am,” she said, referring to a government-run health system.
The perfect recipe for containing medical costs remains to be written and must be tweaked thoughtfully. After all, the American health care system is a major part of the economy. As Dr. Blumenthal, the former Obama adviser, put it: “If you put our health care system on an island and floated it out into the Atlantic it would have the fifth-largest G.D.P. in the world. It’s like saying you have to change the economy of France.”
But after a year spent hearing from hundreds of patients like Mr. Abrahams, Mr. Landman and Mr. Miller, I know, too, that reforming the nation’s $2.9 trillion health system is urgent, and will not be accomplished with delicate maneuvers at the margins. There are many further interventions that we know will help contain costs and rein in prices. And we’d better start making choices fast.
Elisabeth Rosenthal is a reporter for The New York Times who is writing a series about the cost of health care, “Paying Till It Hurts.”

Friday, December 13, 2013

Snow Covers Egypt for First Time in 100 Years

Egypt sees snow for the first time in 100 years. Global warming or cooling? Aivars Lode

Nobody in Cairo was dreaming of a white Christmas, but it looks like they'll get one. The worst snowstorm in more than 50 years hit the Middle East, blanketing Cairo, Jerusalem and areas of Syria in white powder. It was the first time in 100 years that Egypt had seen snow.
Instagram quickly filled with images of snowball fights and landscapes, but in areas like Palestine, some were caught off guard. The United Nations expressed concern for refugees caught in the cold, but many families are ineligible for help because they are not registered with the UN, according to Al Jazeera. Ben Gurion airport in Tel Aviv, Israel, was forced to close its doors briefly after snow clogged its main highway.

Monday, December 9, 2013

Not Fully Inflated

Bubble time again. Aivars Lode

TALK of bubbles is in the air again. The Dow Jones Industrial Average has hit an all-time high. A loss-making technology firm (Twitter) has floated its shares on a flood of investor demand. Private-equity groups are buying companies using amounts of debt not seen since 2008. A record price (more than $50m) has just been set for a penthouse in Manhattan. A triptych by Francis Bacon became the most expensive piece of art sold at an auction when Christie’s flogged it for $142.4m last month. Robert Shiller of Yale University, who correctly identified bubbles in tech stocks in the late 1990s and in property in the 2000s, has expressed unease about giddy American share valuations.
All this suggests that wealthy investors have become increasingly confident. The question is whether they are right to be. Under certain circumstances, fast-rising asset prices are justified. New industries can emerge and create corporate giants (Microsoft, Apple and Google, for example); countries can change their economic policy and grow rapidly (Japan in the 1960s, China in the 1990s). How, then, do you tell a bull market from a bubble?
Mr Shiller describes a bubble as “a psycho-economic phenomenon. It’s like a mental illness. It is marked by excessive enthusiasm, participation of the news media and feelings of regret among people who weren’t in the bubble.” They are often enlarged by an expansion of credit. But establishing an objective definition is hard. For GMO, a fund-management group, a bubble is an increase in the price of an asset of more than two standard deviations above the trend, taking inflation into account.
Using that standard, GMO has identified 330 bubbles between 1720 and 2010. They have become much more frequent in recent decades (see chart). That is partly due to there being more markets to analyse these days. But it is probably also a reflection of the explosion in global capital flows that followed the collapse of the Bretton Woods system of fixed exchange rates in the early 1970s. It is hardly surprising to find that more bubbles have been inflated as investors have rushed round the globe in search of the next big thing.
Many economists have struggled to accept that bubbles exist, as that is difficult to square with the idea of efficient markets. If assets are obviously overpriced, why don’t smart investors take advantage and sell? Edward Chancellor of GMO argues that investors can find it hard to arbitrage away a bubble. Manias can last much longer than investors think, as many contrarians discovered to their cost during the dotcom boom of the late 1990s. Nor do investors know whether a bubble will be resolved through a sharp fall in prices or a long period of stasis, in which inflation erodes prices in real terms (something that happened to British houses in the 1970s).
Dimitri Vayanos and Paul Woolley of the London School of Economics have suggested that problems of agency contribute to bubbles. Investors do not buy shares directly but hire fund managers to do it on their behalf. They tend to select managers who have performed well in prior years. As the managers receive cash from new clients, they buy their favourite stocks which, by definition, will have performed well—witness the enormous sums flowing into tech funds in the late 1990s. The favoured stocks get driven even higher.
Property bubbles also have a self-reinforcing element. Most properties are bought with money borrowed from banks. When prices are rising, banks are more confident about lending money; the greater availability of credit means that borrowers can afford higher prices, and so on. Conversely, of course, when banks become unwilling to lend more money, prices can collapse.
Many commentators believe current monetary policy may be encouraging bubbles to form (see Free exchange). Nominal interest rates in much of the developed world are close to zero, and central banks have been buying bonds through the policy of quantitative easing. The intention is to reduce yields on the safest assets and so encourage investors to buy riskier ones, reducing financing costs for companies and boosting economic confidence through the wealth effect.
Low interest rates may also persuade some investors that risky assets are worth more. If one lowers the rate at which future cashflows are discounted, then the present value of an asset rises. But that is only if other things stay equal. Central banks have adopted their current monetary policy because they worry that the outlook for economic growth has deteriorated; if they are right, then investors should be reducing their estimates for the cashflows they will receive from dividends, rents, etc.
That may leave markets exposed to two risks: that the income from assets does not rise as quickly as investors hope and that capital values decline sharply if monetary policy changes. In its latest report on financial stability, the Bank of England acknowledges that monetary policy has had spillover effects. “Large capital flows into emerging economies have enabled credit levels in these countries to rise sharply,” it states. Emerging markets wobbled this summer when the Federal Reserve spoke of scaling back its monetary stimulus.
Looking back over five years, it is worth reflecting that markets have rebounded from some huge falls in 2008 and early 2009. Investors’ returns over the last 15 years have not been great. But there are a number of markets that look overvalued on an historical basis. American equities are trading at a cyclically-adjusted price-earnings ratio of 25, according to Mr Shiller. This is much higher than the historic average of 16.5 but below the levels reached in the great peaks of 1929 and 2000. Corporate profits are also at their highest level relative to GDP since the second world war, suggesting further growth is unlikely.
Mr Shiller is not yet ready to declare a bubble in American equities, however. There is nothing like the same excitement about shares that was seen in the late 1990s; net flows into mutual funds only just turned positive this year. Another measure of public indifference is that CNBC, a television station that tracks the financial markets, suffered its lowest ratings since 2005 in the third quarter.
Some would put government bonds into the bubble category: last year, yields in some markets reached the lowest levels on record. Buying bonds when yields are less than 2% has in the past led to heavy losses. Again, however, debt markets do not look too frothy by other measures. There is little talk at dinner parties of the massive profits to be earned on sovereign bonds. The biggest buyers have been central banks; there may be a problem when they try to unwind their purchases, but that moment does not look imminent.
The Economist’s house-price indicators suggest that property in New Zealand, Canada and Australia is substantially overvalued (and GMO sees clear signs of bubbles in British and Swedish house prices). But Hong Kong is the only overvalued market where prices are still surging ahead—by almost 20% over the past year.
The Japanese stockmarket is up 51% so far this year (in yen terms), but that constitutes little more than a recovery after nearly a quarter-century of disappointment. Venezuelan equities are up more than fivefold this year (and 273% in dollar terms) but that is not a market many international investors are excited about.
When it comes to collectables like art and fine wine, high prices may simply reflect inequality in the developed world. Throughout history, the rich have liked to demonstrate their status by displaying luxury goods that their inferiors are unable to afford. An Old Master can add real va-va-voom to your Manhattan penthouse.
The asset with a price trajectory most like a satellite launch—until a slump on December 5th— is Bitcoin, an electronic currency. The news media had excitedly chronicled its ascent. Those buying faddish financial instruments without intrinsic value may do well to remember the adage “Up like a rocket, down like a stick.”

Tuesday, December 3, 2013

Speed Traders Meet Nightmare on Elm Street With Nanex

We have questioned the fairness of the modern stock market for a while, the entrenched maintain provides it liquidity. Aivars Lode

The nemesis of Wall Street’s high-frequency traders operates out of an apartment-sized office above the Bliss Salon -- manicure/pedicure $45 -- on Elm Street in the Chicago suburb of Winnetka.
Staring at four computer monitors,Eric Scott Hunsader, the founder of market-data provider Nanex LLC, looks for hints of illicit trading hidden in psychedelic images of triangles dancing with dots that represent quotes to buy and sell U.S. stocks broken down by the millisecond.
Charts of trading produced by Hunsader’s eight-person firm have captivated everyone from regulators to art gallery owners. One stunt involved a computerized piano piece mimicking quotes for an exchange-traded fund. He infuriates some traders, who say Nanex draws unwarranted conclusions and spreads conspiracy theories.
To Hunsader, the images created from market feeds are evidence of high-frequency trading firms exploiting market rules to turn a profit in a lawless environment. Though others in the industry see his reports and charts as propaganda, Nanex’s interpretations are helping to drive the public debate about the fundamental fairness of the modern stock market.
“You ever see ‘Lord of the Flies’ or read that book?” he said, using the William Golding novel about boys stranded on an uninhabited island as a metaphor for the stock market. “When you don’t have a parent around, things fall apart.”

‘Ticker Plant’

As the 51-year-old Hunsader sees it, that’s especially true for a market capable of spewing out quotes to buy and sell stocks at rates as fast as 2 million per second, compared with about 1,000 in the 1990s. The options market can produce quotes at a rate of more than 10 million per second, according to Nanex, whose business is to process the data and distribute it to users in what’s known as a “ticker plant.”
Hunsader’s firm detected what it said was suspicious trading before the government’s jobs report on Oct. 22. On Oct. 16, Nanex identified a buy order worth more than $400 million shortly before the open of European exchanges. The orders for E-mini S&P 500 futures were canceled “just before selling began in earnest,” Nanex said.
Nanex labeled the report “Panthers on the Loose?,” arguing the trades resembled a case that caused the Commodity Futures Trading Commission to order Panther Energy Trading LLC to pay $2.8 million in fines and forfeited trading profits. The firm was accused of “spoofing,” or using an algorithm to illegally place and quickly cancel bids and offers in futures contracts in order to create the false impression of demand.

David, Goliath

“It shouldn’t take the regulator more than an hour to figure out who did it, and a day to find out the intent,” Nanex wrote in the Oct. 16 report. “We’ll wait.”
Hunsader’s firm portrays itself as David fighting industry Goliaths, the deep-pocketed HFT firms that dominate U.S. stock trading. That industry has started fighting back -- accusing Hunsader of drawing the wrong conclusions about what his charts show.
Making a joke about Nanex was the first thing Chris Concannon, a partner at proprietary trading firm Virtu Financial LLC in New York and former Securities and Exchange Commission attorney, did when he stepped to the microphone at an industry event last month.
“I’m required to announce our sponsor of this segment, which is Nanex,” Concannon said to laughter at the Security Traders Association’s Market Structure Conference in Washington. Nanex’s tag-line, he said, is “making markets better with inaccurate information.”

Advance Word

Virtu and Nanex had traded insults since Hunsader published a report on Sept. 20, two days after the Federal Reserve surprised markets by not reducing the $85 billion of monthly bond purchases it makes in its quantitative easing program.
Titled “Einstein and The Great Fed Robbery,” the report cited market data that it said showed some trading firm or firms got advance word about the Fed’s decision and then used the milliseconds-long head start to place bets totaling more than $1 billion. A millisecond is one-thousandth of a second, or three places to the right of the decimal point -- one farther out than how Olympic track and swim times are posted. Following the report, the central bank began a review and ultimately tightened the way it releases its statements.
Virtu’s report said Nanex’s study was “severely flawed” because of the type of data feed it relied on. Hunsader replied that Virtu needs to buy a “new calculator” and that if you read the report closely enough it corroborates his own theory that the information left Washington early.
Concannon didn’t respond to five phone calls and e-mails seeking comment on Nanex’s statements.

‘Disprove Mine’

Hunsader, dressed in jeans, a white short-sleeved shirt and running shoes in the Winnetka office, points at the approximately 3,000 pieces of trading research he’s released, claiming he has never stood down from a finding. How do you publish that many reports, he said, “and not ever have to retract them?”
“If you can’t prove your point, then disprove mine,” he said. “But don’t go around saying we think you’re making leaps without backing it up.”
A high-frequency tweeter with more than 11,000 followers, Hunsader conducts his crusade on the Internet and with interviews with journalists, documentary film-makers and others looking for someone to explain today’s computerized market.
Many of his more than 11,500 Twitter posts contain links to his charts highlighting unusual patterns in stock quotes and often blaming computer algorithms being used by HFT firms. “Obscene manipulation in $AAPL stock. Where’s @SEC_News on this & 1000’s of other examples?” he posted on Oct. 5, referencing the symbol for Apple Inc. and a Twitter feed run by the SEC.

Market Police

Regulation NMS, the set of rules that opened stock trading to greater competition six years ago, has helped fragment the almost $22 trillion U.S. market to the point where orders to buy and sell bounce between 13 exchanges and more than 40 alternative platforms. Bloomberg LP, parent of Bloomberg News, operates an equities venue called Tradebook and is a provider of market data and analytics.
In Hunsader’s view, the computerized firms that benefit from the fragmentation by profiting off fleeting price discrepancies between markets are not being policed enough.
The results, according to Hunsader, included higher data-processing fees and unexplained lurches in the prices of individual stocks that cause investors anxiety. There is also the potential for more outright disasters, he said, like the May 2010 “flash crash” when the Dow Jones Industrial Average extended a drop to almost 1,000 points within minutes.


Nanex regularly misunderstands what it sees in market data and is fueling misconceptions that damage investor confidence, according to Manoj Narang, founder and chief executive officer of HFT firm Tradeworx Inc. in Red Bank, New Jersey. He compared Nanex to the “truthers” who doubt the official explanation of the Sept. 11 terrorist attacks.
There are usually benign explanations for what look to Nanex like attempts to manipulate prices through what it calls “quote stuffing,” he said. For example, he said, bursts of quotes could be trading algorithms reacting when the difference between the best bid to buy and the best offer to sell grows to more than a penny. The programs automatically cancel the orders after exchanges modify them to avoid markets where bids equal offers, according to Narang, resulting in “inadvertent repetitive behavior” by algorithms.
“The conclusions that they form generally have a paranoid or conspiracist sort of bent to them,” said Narang. “Stirring the pot like that and dabbling in all of these conspiracy theories, and having those things get a serious airing, undermines investor confidence. And for no real reason.”
Simplifying a market that is spread across so many trading venues is easier said than done, said Larry Tabb, chief executive officer of market-research firm Tabb Group LLC.

‘Too Complex’

“The markets are certainly too complex,” Tabb said in an e-mail. “The problem is how do you simplify it? Are there too many exchanges? Too many dark pools? Too many algorithms? To simplify the structure the SEC needs to make some very unpopular decisions that go against 15 years of market structure history, which actually benefits many investors. They are in a difficult spot.”
The Nanex founder said one place for the SEC to start is to use its new Market Information Data Analytics System, known as Midas and built by Tradeworx, to explore what he considers one of the top issues with modern markets. Direct data streams from the exchanges, which HFT firms such as Virtu receive, are delivering more timely information than the consolidated feeds that are sent to the rest of the market and were meant to level the playing field, Hunsader said. Hunsader’s firm uses the consolidated feeds.

Boutiques, Nanex

SEC spokesman John Nester declined to comment on Nanex’s assertions. Also declining to comment were Eric Ryan, a New York Stock Exchange spokesman; Rob Madden of Nasdaq OMX Group Inc.; and Randy Williams of Bats Global Markets Inc., which is combining with Direct Edge Holdings LLC.
Nanex’s office in a village of upscale cafes and boutiques consists of a room dominated by Hunsader’s wall of monitors, another filled with stacks of servers, a common area with a mini-fridge stocked with soda -- and not much else.
Answering the front door is Nate Rock, a 34-year-old software engineer with a bushy beard and a penchant for dropping references to Dungeons and Dragons into conversation. He became interested in Hunsader’s work after trying to invest some spare money made at a previous job at Infinite Campus Inc., which makes software for educators and students.

Barefoot ‘Dogbert’

Barefoot, wearing camouflage shorts and a black T-shirt that says “meh,” Rock uses the professional title “Dogbert” in reference to the canine sidekick in the “Dilbert” comic strip. He read about Hunsader’s work on the blog Zero Hedge and got a job after exchanging e-mails with Nanex programmer Jeff Donovan during a vacation day spent drinking with a buddy and watching Facebook Inc.’s initial public offering in May 2012.
“My original schooling was in sciences and I saw the work that Eric was doing and I was like, he’s a scientist,” Rock said. “It’s very detailed down to the millisecond. And I hadn’t seen that anywhere.”
Among those who have come here to pick Hunsader’s brain is Jim Angel, a finance professor at Georgetown University who studies market-structure issues. He said Hunsader’s research is a valuable service even if he doesn’t always agree with the conclusions, since there’s not enough information available to prove what is happening in the charts.

‘Some Blemishes’

“I don’t think his analysis is always correct,” Angel said. “He doesn’t know who’s trading, who’s putting in the various quotes. But there are imperfections in our market operations. And even though on average our markets are a whole lot better than they were 10 or 20 years ago, the reality is, hey, there’s still some blemishes around the edges that can and should be addressed. And he draws attention to them.”
Hunsader has delivered his critique of the markets to everyone from officials at the Federal Reserve Bank of Chicago to members of Britain’s government at 10 Downing Street in London.
“He’s kind of the mosquito in the room that people pay attention to,” said Van Hutcherson, trader at JonesTrading Institutional Services LLC in Oak Brook, Illinois. “He shines a light on some pretty important situations that I think go unnoticed because the majority of folks, unless you’re super sophisticated, don’t have the technology.”


To illustrate computerized trading to the general public, Nanex has turned trading data into animated videos, with triangles and dots representing tens of thousands of orders dashing between exchanges. One video he posted on YouTube showed a 50-millisecond period in which quotes for Nokia Oyj dashed around the market at a rate of 22,000 per second. The video, published on Oct. 9, has been viewed more than 6,400 times.
He programmed a computer to play piano notes corresponding to different bids and offers for a popular exchange-traded fund, resulting in a manic staccato composition even when slowed down. It was meant to highlight what Hunsader says is the absurdity of modern computerized trading.
“Everybody who’s gone this route has had to be a little bit theatrical and Wall Street doesn’t like it,” said Haim Bodek, founder of Decimus Capital Markets LLC, which develops computer programs to help institutions better trade with HFT firms and avoid “predatory” behavior.

‘Deep Flaws’

“The irony here is that he really is addressing these deep flaws,” said Bodek, who previously founded Trading Machines LLC, a high-frequency options firm, and headed electronic volatility trading at UBS AG.
One of Nanex’s charts was featured in artist Trevor Paglen’s book “The Last Pictures,” an archival disc of which was launched into space aboard a satellite a year ago as part of a project to leave “artifacts of human civilization” that will continue to orbit Earth long after humans are gone, according to the project’s website.
Hunsader started in the era of floppy disks, spending “my total life savings,” he said, to buy a personal computer in 1984, a machine he still keeps under his desk. He stored each day’s trading data from the Chicago Mercantile Exchange and sold the information on a computer bulletin board, the precursor of the Internet.

Cadillac, Compaq

In 1987 he got a job offer from Tom Joseph, founder of Trading Techniques Inc., who developed technical-analysis charts to study movements of asset prices. While most traders were still shouting or making hand signals on exchange floors or hunched over early desktop PCs, Hunsader and Joseph were able to check stock charts as they rode around in Joseph’s Cadillac with a Compaq computer hooked up to a car phone.
Trading Techniques was bought by CQG, a trading software maker, and Hunsader went to work for that firm. He read a book on Java code, then wrote an application that allowed users to get streaming intraday stock charts on the newly developing Internet. The founder of the website was interested in the application and hired Hunsader.
“We put it up on their site and we went from zero to 10,000 paying subscribers in about 18 months,” he recalls. “About $100 a month these guys are paying for this little thing on the net. They had to hire temps in on the weekends to freaking process all the credit cards.”

Number Five

The Internet portal Lycos Inc. bought in 1999 and Hunsader left. The next year he focused on writing the software for his own venture, into which he poured thousands of hours of development time.
The result was the ticker plant Nanex, which receives quotes from consolidated market feeds and distributes the data to users through software that allows them to analyze, chart it and write their own trading programs to complement its software.
The flash crash inspired Hunsader to look more closely at the data he was distributing. He set out to figure out what was going on with Donovan, a southern California surfer and ticker-plant programmer who also develops three-dimensional graphics software.
“We saw the SEC was kind of dragging,” Hunsader recalls, “I said to him, ‘you know what, we’ve got the data. We could do this. Let’s see what we could do, let’s just have fun.’”
As the pair drilled through the quotes, unexpected patterns emerged in charts for stock orders. They called them crop circles, a reference to the mysterious patterns sometimes reported in grain fields, and published them as research on the firm’s website.
“That was a blessing and a curse,” Hunsader said. “It was a blessing because it caught the eye of Main Street, and it got us into the Atlantic which got us into the New York Times. But the curse was that the Wall Street glitterati, or elites, used that to paint these as conspiracy.”

Tuesday, November 19, 2013

Credit-Driven China Glut Threatens Surge Into Bank Crisis

Sound familiar? We identified this would happen at least a year ago. Aivars Lode
In China’s “Shipping Valley,” where the Yangtze River empties into the sea north of Shanghai, the once-bustling home of the nation’s biggest private shipbuilder is deadly quiet on a recent morning.
Rows of dilapidated five-story dormitories in the city of Nantong, previously housing China Rongsheng Heavy Industries Group Holdings Ltd.’s 38,000 employees, were abandoned after the shipbuilder teetering on collapse cut almost 80 percent of its workers over the past two years. Most video arcades, restaurants and shops serving them have closed.
A $6.6 trillion credit binge during the past five years, encouraged by Beijing policy makers as stimulus to combat a global economic slowdown, now threatens to stoke a debt crisis. At stake are trillions of yuan in bank loans that companies producing everything from ships to steel to solar power are struggling to repay as the world’s second-largest economy heads for the weakest annual expansion since 1999.
Rongsheng, which is seeking a government bailout after accumulating 25 billion yuan ($4.1 billion) in unpaid loans as of June, including to Bank of China Ltd., is a casualty of over-investment gone bust. In Nantong, the only remaining market is selling past-its-shelf-life bread, woolly shoe pads and other dusty items at a discount as shopkeeper Qiu Aibing prepares to wind down before winter. There’s no sign of a single customer.
“After I’m done selling all this stuff, I’ll be gone,” said Qiu, briefly lifting his eyes from a TV and casting a careless look at the half-empty shelves. “The workers didn’t have money to spend anyway because there’s no work to be done, and many of them haven’t been paid for months.”

Bad Loans

China’s biggest banks are already affected, tripling the amount of bad loans they wrote off in the first half of this year and cleaning up their books ahead of what may be a fresh wave of defaults. Industrial & Commercial Bank of China Ltd. and its four largest competitors expunged 22.1 billion yuan of debt that couldn’t be collected through June, up from 7.65 billion yuan a year earlier, regulatory filings show.
“In the next three to four years, industries with excess capacity will be the main source of credit loss for banks and their nonperforming loans as China cleans up the legacy,” said Liao Qiang, a Beijing-based director at Standard & Poor’s. “The speed of the process will depend on the government’s determination and whether they are willing to incur short-term pain for long-term gain.”

‘Very Painful’

Premier Li Keqiang, who took office in March, pledged to open the economy to market forces and strip power from the government in a process he described as “very painful and even feels like cutting one’s wrist.” In July, he vowed to curb overcapacity, which the government blames for driving down prices, eroding profits and generating pollution. Policy makers meeting in Beijing last week said they would elevate the role of markets in the nation’s economy.
China’s economy probably will expand 7.6 percent in 2013, the weakest pace since 1999, even as growth rebounded in the third quarter, according to the median estimate of economists surveyed by Bloomberg News.
Shang Fulin, China’s top banking regulator, this month urged lenders to “seek channels to clean up bad loans by industries with overcapacity to prevent new risks from brewing” and refrain from dragging their feet in dealing with the issue.

Credit Deterioration

China’s credit quality started to deteriorate in late 2011 as borrowers took on more debt to serve their obligations amid a slowing economy and weaker income. Interest owed by borrowers rose to an estimated 12.5 percent of China’s economy from 7 percent in 2008, Fitch Ratings estimated in September. By the end of 2017, it may climb to as much as 22 percent and “ultimately overwhelm borrowers.”
Meanwhile, China’s total credit will be pushed to almost 250 percent of gross domestic product by then, almost double the 130 percent of 2008, according to Fitch.
The nation might face credit losses of as much as $3 trillion as defaults ensue from the expansion of the past four years, particularly by non-bank lenders such as trusts, exceeding that seen prior to other credit crises, Goldman Sachs Group Inc. estimated in August.
Rongsheng, whose assets jumped sevenfold between 2007 and 2012 when government-directed lending led to a shipbuilding boom, also has loans outstanding to Export-Import Bank of China and China Development Bank Corp., state-owned policy banks set up to provide financial support at a cheaper cost to companies and industries endorsed by the government. Rongsheng may post a second consecutive loss of 2 billion yuan this year and a 1.1 billion yuan loss in 2014, according to a median estimate of analysts in a Bloomberg survey.

Delayed Salaries

Rongsheng now relies on its remaining 8,000 workers to build the world’s biggest cargo ships for Brazil’s iron-ore producer Vale SA and Oman Shipping Co., as well as smaller vessels and oil tankers. Workers in its shipyards, mostly from other parts of China, and local staff in its Shanghai office have had their salaries delayed, sometimes by two months, a person with knowledge of the matter said.
“I can still manage to survive by cutting expenses here and there, but many migrant workers can’t -- not with only 20 yuan in their pockets and not knowing their next payday,” said Liu Guojun, a blue-uniformed dormitory maintenance and security worker who earns 2,000 yuan a month. “There’s a surge in theft and other petty crimes around here as a result.”
Rongsheng declined in an e-mail to answer questions about its operations. Spokesmen for ICBC and China Construction Bank Corp. declined to comment on the prospect of rising bad loans, while those at Bank of China, Agricultural Bank of China Ltd. and China Development Bank didn’t respond to requests.

Shipyard Shutdowns

The pain is being experienced by Rongsheng’s peers nationwide. A third of the country’s 1,600 shipyards may shut down within five years amid a global vessel glut, Wang Jinlian, secretary general of the China Association of the National Shipbuilding Industry, said in July.
To Ji Fenghua, chairman of Nantong Mingde Heavy Industry Group Co., another struggling “Shipping Valley” builder specializing in high-end vessels, that’s an understatement.
“I won’t be surprised if half of the shipbuilders fail, given the excess capacity,” said Ji, recounting the day in July 2012 that hundreds of his workers who hadn’t been paid in three months besieged his office building.

Repaying Banks

The company was strapped for cash as state-backed banks recalled their loans after the banking regulator ordered that new financing be stopped for shipbuilders and some other businesses. Deprived of new credit to pay off old debts, Ji and his fellow founders emptied their own bank accounts, collateralized their homes to banks and hit up relatives and acquaintances for cash.
“Every cent of the money we earned and borrowed was used to repay banks, leaving us nothing to pay workers or the suppliers,” Li said. “We have banks to thank for our boom, and we have them to blame for our doom.”
Mingde Heavy eventually survived the crisis with government help. Its cash shortage continues even as the company continues to take orders for stainless-steel chemical tankers.
The central government pledged 4 trillion yuan in economic stimulus during the global financial crisis starting in 2008. In 2009, Export-Import Bank of China committed to 160 billion yuan of credit to the nation’s two largest state-run shipbuilders, while Bank of China agreed to help smaller and private companies, according to statements from banks.
Easy access to credit helped Chinese banks churn out record profits and reduce bad-loan ratios to less than 1 percent as of June 30 from 2.8 percent at the end of 2008.

‘Industrial Glut’

“The 2008 stimulus exacerbated an industrial glut that has been in existence since 2003,” S&P’s Liao said. “We expect the government to take measured steps in a crackdown on overcapacity because they need to weigh the impact on financial stability.”
Nonperforming loans at Chinese banks increased for an eighth consecutive quarter in the three months ended Sept. 30 to 563.6 billion yuan, extending the longest streak in at least nine years. Still, they account for just 0.97 percent of the nation’s outstanding loans, according to the China Banking Regulatory Commission.
The bad-loan ratio could climb to as high as 1.5 percent in the next few quarters, according to Lian Ping, chief economist at Shanghai-based Bank of Communications Co. Most of the increase, he said, will come from the provinces of Jiangsu, where Nantong is located, and Zhejiang, south of Shanghai, where small businesses have been hit hard by the slowdown.

Turning Tide

In the first six months of this year, soured loans increased by 18 billion yuan in Jiangsu, more than any other Chinese province, followed by Zhejiang and Shanghai, the official Xinhua News Agency reported.
“There are many capital-and-labor-intensive industries that have relied on bank loans and policy support for their past success,” Lian of the Bank of Communications said. “But now the tide is turning against them.”
Shipbuilding isn’t the only industry affected by overcapacity. Also in Jiangsu, about 130 kilometers (80 miles) southwest of Nantong, Wuxi Suntech Power Co., the main unit of the industry’s once-biggest supplier, went bankrupt with 9 billion yuan of debt to China’s largest banks, according to a Nov. 12 report by Communist Party-owned Legal Daily. Suntech Power Holdings Co., the parent firm, defaulted on $541 million of offshore bonds to Wall Street investors.

Solar Panels

About 1 gigawatt of solar-panel production, more than 40 percent of the company’s 2011 module manufacturing capacity, was idled at one of two factories, according to a statement issued by Shunfeng Photovoltaic International Ltd., which agreed to buy Wuxi Suntech on Nov. 1 for 3 billion yuan. A gigawatt is about as much as what a new nuclear reactor can supply.
Government and banks’ support for the solar industry since late 2008 has resulted in at least one factory producing sun-powered products in half of China’s 600 cities, according to the China Renewable Energy Society in Beijing. China Development Bank, the world’s largest policy lender, alone lent more than 50 billion yuan to solar-panel makers as of August 2012, data from the China Banking Association showed.
China accounts for seven of every 10 solar panels produced worldwide. If they ran at full speed, the factories could produce 49 gigawatts of solar panels a year, 10 times more than in 2008, according to data compiled by Bloomberg. Overcapacity has driven down prices to about 84 cents a watt, compared with $2 at the end of 2010. The slump forced dozens of producers like Wuxi Suntech into bankruptcy.

‘Much Worse’

An unidentified local bank reported a 33 percent nonperforming-loan ratio for the solar-panel industry, compared with 2 percent at the beginning of the year, with the increase due to Wuxi Suntech, China Business News reported in September.
“The real situation is much worse than the data showed” after talking to chief financial officers at industrial manufacturers, said Wendy Tang, a Shanghai-based analyst at Northeast Securities Co., who estimates the actual nonperforming-loan ratio to be as high as 3 percent. “It will take at least one year or longer for these NPLs to appear on banks’ books, and I haven’t seen the bottom of deterioration in Jiangsu and Zhejiang yet.”
The Wuxi government in 2007 planned to build a 2.2-square-kilometer solar-panel park with projected sales of 100 billion yuan by 2012. The area is now covered with weeds and construction waste, left undeveloped because of overcapacity.

Steel, Cement

The same is true in industries such as steel and cement, which were named by the State Council as facing a “serious” glut. China’s economic planners have sought to rein in the steel industry since at least 2004, when work on a 10.6 billion yuan project in Jiangsu was halted. Even so, annual capacity has risen to 970 million metric tons, according to the steel association, exceeding the industry’s output by 35 percent in 2012. China produces seven times more than No. 2 Japan.
About 10 million tons of aluminum production capacity is being built at a time when the industry incurred combined losses of 670 million yuan in the first half, with some producers in central and eastern China facing severe losses, the Ministry of Industry of Information Technology said in July.
That month the ministry ordered more than 1,400 companies in 19 industries including steel, ferro alloys and cement to cut excess production capacity this year, an indication that the government is pursuing pledges to fix fundamental issues in the economy even as growth slows. Excess capacity was supposed to be idled by September and eliminated by year-end.
China’s land ministry yesterday told local authorities to ban allocations for any new production projects by overcapacity industries including steel and shipbuilding, the official Xinhua News Agency reported.

Hawkish Tone

“The central government is hawkish in its tone, but when it comes to execution by local governments, the enforcement will be much softer,” Bank of Communications’ Lian said. “Many of these firms are major job providers and taxpayers, so the local government will try all means to save them and help them repay bank loans.”
When hundreds of unpaid Mingde Heavy workers took to the streets for a second time last November, the local government stepped in by lining up other firms to vouch for Mingde so banks would renew its loans. Mingde Heavy avoided failure by entering into an alliance with a shipping unit of government-controlled Jiangsu Sainty Corp., which also imports and exports apparel.


“I have everything I need to become a top-tier shipbuilder but the money,” said Ji, Mingde’s chairman. “I used to be proud that we are an independent, private company without government interference. Not anymore. The pressure is much less when you have a rich mother-in-law.”
Under President Xi Jinping’s reforms laid out last week, the private sector will be boosted by looser state controls, while local government officials will be evaluated not only on increases in GDP but also on indicators such as energy consumption, overcapacity and new debt.
China’s lending spree has created a debt burden similar in magnitude to the one that pushed Asian nations into crisis in the late 1990s, according to Fitch Ratings.
As companies take on more debt, the efficiency of credit use has deteriorated. Since 2009, for every yuan of credit issued, China’s GDP grew by an average 0.4 yuan, while the pre-2009 average was 0.8 yuan, according to Mike Werner, a Hong Kong-based analyst at Sanford C. Bernstein & Co.

Credit Cycle

“If credit allocation in China improves, the ultimate credit cycle and economy downturn will be mitigated,” Werner wrote in an Oct. 21 note to investors. “However, if China continues to rely on debt to fund its economic growth, the country’s ultimate credit cycle will be more severe.”
Based on current valuations, investors are pricing in a scenario where nonperforming loans at the largest Chinese banks will make up more than 15 percent of their loan books, according to Werner, who forecasts a 2.5 percent to 3.5 percent bad-loan ratio by the end of 2015. A further decline in GDP growth would lead to more soured loans and weaker earnings, he said.
Lenders so far haven’t reported significant deterioration in loan quality. Bank of China said it had 251.3 billion yuan of loans to industries suffering from overcapacity as of the end of June, accounting for 3 percent of the total. Its nonperforming-loan ratio for those businesses stood at 0.93 percent, the same level reported for the entire bank.
At China Construction Bank, loans to industries with overcapacity fell about 8 billion yuan in the first half of the year to 180.8 billion yuan, while at Bank of Communications, the amount was 72 billion yuan or 2.3 percent of the total, the banks reported.

Dividends Curbed

Credit growth may slow over the next year and a half from the 20 percent to 25 percent gains in recent years to about 15 percent, Josh Klaczek, head of Asia financial services for JPMorgan Chase & Co., said in July. The expansion of nonperforming loans will depress profits and curb the ability of banks to increase dividends, and if more loans sour, lenders may need to raise capital, he said.
“Banks currently have the ability to absorb a decent amount of bad loans, and local government involvement will slow the speed of NPL increases,” S&P’s Liao said.
While China’s cabinet in July urged mergers and curbs in the shipbuilding industry, it called for continued financial support to help “quality companies” maintain their operations.
In Nantong, handmade-noodle-shop owner Ma Shuntian said he’s still a believer, even after losing 50,000 yuan this year. Ma and his wife pumped almost 1 million yuan into the restaurant five years ago after selling everything they had in Qinghai province and moving to the area where Rongsheng’s workers reside. In a good year, selling noodles brought in more than 100,000 yuan in profit.
“I hope Rongsheng can come through this crisis and the town comes back to life,” said Ma, a father of three. “If they earn big money, I can earn small.”

Thursday, November 14, 2013

High-end Samsung slabs, cheapie Androids take healthy BITE out of Apple's market share

Looks like Apple's day in the sun is over, they just got plain greedy. Aivars Lode

By Paul Kunert 
Q3 sales growth stalls but Redmond's Surface still waiting in wings
The rise of entry-level slabs coupled with an "ageing" portfolio caused Apple iPad sales growth to flatline in calendar Q3 and market share to crash, analyst figures have confirmed.
Global sales-in numbers – shipments to retailers and distributors – show that 51.5 million slabs were rolled out in the three months, up 113 per cent on the same quarter in 2012.

And while the post-Jobsian empire is still top of the tab tree, sales were 14.1 million, up 0.3 per cent year-on-year. As a result market share more than halved from 58.2 per cent to 27.4 per cent.
Tim Coulling, senior analyst at Canalys, said Apple's "ageing portfolio", new devices were launched after the quarter ended and these additions were "overdue".
"The tablet market develops so fast that a year ago is a long time," he told us. "Android has got better on entry level tablets, we have seen that market explode but Apple stood still with unit shipments and lost share."
He said that a year ago the "tide had started to turn" as vendors realised they needed to slash costs to be competitive and upsell customers to higher-end devices – their latter efforts have been a boon for Samsung.
In the low-end Android space, product margins are in the low-single digits - the stuff of nightmare for Apple CEO Tim Cook.
Korean chaebol Samsung saw Q3 sales shoot 2.6 times to 9.5 million units, handing it a market share of 18.5 per cent versus the 10.9 per cent it held a year ago. It picked up share in the 10-inch-and-above tablet bracket, where Apple's kit was greying.
Sneaking into third for the first time is PC-maker Lenovo, on the back of 2.3 million shipments, 27 per cent of which were in Greater China. It also did well in Latin America, where it acquired CCE. It sold just 439,000 tabs in the same period a year ago. Market share hit 4.5 per cent.
The Chocolate Factory, AKA Google, slumped to 3.6 per cent market versus the 6.2 per cent it held a year ago as sales grew 24 per cent to 1.85 million tabs, much slower than the market average.
Coulling said Google is not gunning for market and much like Microsoft is using the Nexus 7 as a design reference point for its operating system.
Asus, which makes the Nexus 7 and therefore could actually stake a claim to being the third largest maker of slabs, grew 96.1 per cent to 1.7 million tabs, giving it a market share of 3.3 per cent.
Hidden among the rest was Microsoft Surface, which found a home with 850,000 users (60 per cent Pro and 40 per cent RT) versus 300,000 last quarter. Market share grew to 1.65 per cent compared to 0.89 per cent.
This was driven by a lot of deals where the price of RT was slashed, and expansion of the Pro was due to it being rolled out in more countries and through channel partners.
Looking ahead, tab sales are overtaking those of notebooks, whereas they were "level pegging" in Q3, said Canalys. PC buyers in the festive season are clearly opting for a fondler. ®

Tuesday, October 15, 2013

3 Americans win economics Nobel

American economists getting Nobel prizes, pity they did not predict the meltdown. Aivars Lode

STOCKHOLM (AP) — Americans Eugene Fama, Lars Peter Hansen and Robert Shiller won the Nobel prize for economics on Monday for developing methods to study trends in stock, bond and housing markets.
The Royal Swedish Academy of Sciences said that through their separate research, the three had laid the foundation of the current understanding of asset prices and changed the way people invest.
While it's hard to predict whether stock or bond prices will go up or down in the short term, it's possible to foresee movements over periods of three years or longer, the academy said.
"These findings, which might seem surprising and contradictory, were made and analyzed by this year's laureates," the academy said.
Fama, 74, and Hansen, 60, are associated with the University of Chicago. Shiller, 67, is a professor at Yale University.
Shiller, an economist famous for having warned against bubbles in technology stocks and housing, said he reacted with disbelief when he got the call from the academy early Monday.
"People told me they thought I might win. I discounted it. Probably hundreds have been told that," he said to The Associated Press.
Shiller is known for developing the Case-Shiller index, a leading measure of U.S. residential real estate prices, with Karl Case, a Wellesley College economist.
He said he believes finance is a structure for society, which if regulated properly is "at the core of our civilization."
"It seems to some people it's selfish and money-grubbing. It doesn't really have to be that way. The financial crisis we've been through is traumatic, but we're learning from it," Shiller said.
For example, he said many students from other countries are able to study in the United States because of financial aid made possible by financial investments. He also said the Consumer Financial Protection Bureau established as a result of the recession is holding finance to higher standards.
Starting in the 1960s, Fama and others showed how difficult it is to predict individual stock prices in the short run. His findings revolutionized the practice of investing, leading to the emergence of index funds.
Two decades later, Shiller showed that there is more predictability in the long run in stock and bond markets, while Hansen developed a statistical method to test theories of asset pricing.
"These are three very different kinds of people and the thing that unites them all is asset pricing," says David Warsh, who tracks academic economists on his Economic Principals blog.
American researchers have dominated the economics awards in recent years; the last time there was no American among the winners was in 1999.
The Nobel committees have now announced all six of the annual $1.2 million awards for 2013.
The economics award is not a Nobel Prize in the same sense as the medicine, chemistry, physics, literature and peace prizes, which were created by Swedish industrialist Alfred Nobel in 1895. Sweden's central bank added the economics prize in 1968 as a memorial to Nobel.
This year's Nobel science prizes awarded ground-breaking research on how molecules move around inside a cell, particle physics and computer modeling of chemical reactions. Canadian short-story writer Alice Munro won the Nobel Prize in literature and the Organization for the Prohibition of Chemical Weapons was awarded the Nobel Peace Prize.
All awards will be presented to the winners amid royal pageantry on Dec. 10, the anniversary of Nobel's death in 1896.