Monday, June 4, 2018

News about Russia/US

Yesterday the Wall Street Journal reported that US administration officials were planning for a Trump-Putin summit. This led to a rally in Russian stocks (including Norilsk). If true, it might signify a shift in western-Russian relations. If that happens, the Russian stock market has MUCH more to climb. Readers of this blog know that I have been saying for awhile that the current situation is in no one's interest. Let's go a little deeper.
For those readers not located in the US (most of you) here's a little background on how leaks work in the US government...
 There are three sources of leaks. One is ambitious politicians and officials who want to curry favor with journalists. By feeding the journalists inside information, they help both the politicians' and the journalists' careers. Most of these leaks concern things that are being planned or discussed inside the government. They are usually accurate and not embarrassing.
A second source is leaks that are staged by the highest levels as a trial balloon for policies they are considering. Ex-pres Obama would run things by the editorial staff of the New York Times before he took action.
The third type of leak is by an official who wants to hurt someone. Either he is trying to get back at an enemy or he is genuinely concerned that bad things are being done. Since the Washington establishment hate Trump and all he stands for, there has been a lot of this going around.
I think the WSJ leak about a summit was the second type. First, it wasn't embarrassing or derogatory. Such a summit is a logical thing to do, but administration officials are probably concerned that any dealing with Russia could ignite a firestorm. It was leaked to a somewhat friendly source, the WSJ, who could be counted on to analyze it rationally. So I believe this is the real deal and can actually happen.
If I'm right about this, here's is what we can expect to see:
- Russia being brought into the emerging North Korean solution. This is the major short run diplomatic effort, and Russia has a real interest.
- Oil prices topping out. This may have already happened.
- A reduction in provocations, particularly military ones. I do not think this has happened yet.

more to come...

Stopped out of the rest of my corn this morning

Nice trade though.
The crop looks quite good at this point. I continue to believe that demand for corn is growing and will eventually push up prices. However, there is no fighting the US crop during the growing season. So I'll probably be out till the fall.
Tactically, this shows the virtue of scaling out instead of always letting your profits run. Lesson confirmed.

Thursday, May 31, 2018

Why don't Neural Nets Work?

There have been a few high visibility funds that have proclaimed they are going to trade on signals from the neural network type of artificial intelligence. Several of those have not done well, and I hear that there will be some other disappointments as well. So why isn't this technique working? After all, it has had great success in image and speech recognition, and is making some progress in language recognition.

There's been so much hype in the popular press about AI that it seems journalists have suspended their critical thinking. Here's the story. Virtually all machine learning, include the neural nets, are basically automated statistics. The algorithms range from simple curve fitting to extremely complicated, but they are all about finding regular patterns in data. For example, suppose you want to identify an image of a cat as a cat. The algorithm takes the pixel information and performs a very complex optimization that essentially relates every pixel to every other pixel. It gets fed in data for possibly millions of images of cats (and non-cats) and finds the optimal relationship that makes the images "cat-like." This can work pretty well because cats don't change much. They may get bigger or smaller or change color, but there is something about their look that remains cat-like. In stat terms, the basic look of a cat is a stable system.

If the system thats being analyzed is not stable, this will not work. Liquid assets returns are not stable. There's been a lot of work on this. They were somewhat statistically stable years ago, and that's why the systematic guys were able to print money for so long. But these have been arbitraged out. Not only are asset returns not stable, but they are like a game in which the players are intentionally working to destroy whatever stability there is.

OK, enough of my being Debbie Downer. There are regularities in liquid assets returns that can be traded. The key is to look for regularities that are hard to arbitrage with leverage. People who have read this blog for awhile know that I believe long-term trades are included in this. There are some others as well, which I'll go into as time goes on.

Tuesday, May 22, 2018

Norilsk and Palladium

I have had a position in the Russian company Norilsk for almost two years. It's done well, although it has huge ups and downs. It took a 15% hit the day the US put sanctions on Rusal. Rusal and Norilsk have some cross ownership by O. Deripaska, who was also sanctioned. There was a fear that Norilsk would also be sanctioned. It hasn't happened so far, and it's possible that Norilsk will be controlled by V. Potanin. Potanin is not being sanctioned, and his view of the company's future includes smaller dividend payouts and more spending on capex.
I agree with the increased capex. Norilsk's products are going to be in short supply over the next few years because of low worldwide capex. So the added investment will be value-producing. However, the foreign investors who set the price on a day to day basis probably do not agree. They have a higher discount rate for any Russian company than the large Russian shareholders do. So I expect some kind of move down when and if the new dividend policy is announced.
I also want to point out that Norilsk share prices seem to be following the price of palladium rather than the price of nickel. Norilsk gets about the same revenue from both, but nickel prices have been rather stable. Here's a graph of NILSY (in $US) and palladium over the last 100 days indexed to 1.00.
The two lines do move together pretty well. The big one-day fall in NILSY was when sanctions were announced.

Long term there has been little investment in both nickel mines or in S. African precious mines. So I think prices will be a tailwind for Norilsk. There may be a switch from palladium to platinum, but I do not think it will be major.
As far as the Russian risk goes, I have posted before that I think the "new cold war" is silly and not in Russia's interest. But I don't make policy; I only react to it. So I do think that US-Russian tensions should abate, but only time will tell.

Tuesday, May 15, 2018

Corn progress and more Lynas

As of the May 14 report, corn planting was about even with the five year average. So that's one risk that has passed. The weather for most of the corn belt is expected to be average for the rest of the month. So we probably won't get another scare until and unless we get abnormal heat later in the season.
OTOH, demand for US corn is still pretty good. And acreage is way down. So I doubt the market can have a steep decline until the crop is made. I'm keeping some of my position and hope to add on weakness.

So I really know how to time Lynas! Just as I wrote the post, the stock took a deep dive. The trigger was a report in a Malaysian online newspaper saying that some local officials wanted to look again at the risk in Lynas's facility. I read it, and it seemed like the same old guys saying the same old things. Is it possible that the new regime will give into them? Like I said a few days ago, I don't think so.
- There really is very little risk, and
- Malaysia needs to show it believes in the rule of law.

I'm going to wait this one out. Time will tell.

Thursday, May 10, 2018

Lynas Article


Yesterday I published an article on rare earths and Lynas on Seeking Alpha.

I am blown away by the response to this article. It's has one of the highest page views I have written. I thought I was analyzing a small, underresearched industry. Turns out there is a large cohort who were already following it. That's not necessarily a good thing.

Now, the Malaysian election. As far as I can tell, the new party is not "populist" in the sense that the new government in Italy will be. Rather it's a reaction to corruption on a very large scale. It's also a reaction to a recent drop in economic growth. However, if Malaysia wants to get out from under the "middle income trap" it's going to have to upscale its exports. That means foreign capital and foreign technology. So they would be foolish to punish Lynas simply to appease the scaremongers. However, this all depends on Lynas continuing to run without environmental problems. If they screw up, all bets are off.

I bought a little more Lynas on the dip last night. This company has a beta to the S&P of 3, so be careful.

Wednesday, May 9, 2018

Link to Seeking Alpha Article

...on rare earths and Lynas.
https://seekingalpha.com/article/4171588-rare-earths-groaning-please?v=1525871160&comments=show
This is a "non-pro" article so it will be available to everyone. I don't get paid for it either, but that's not going to change my lifestyle.