Static Chaos - The Only Reality

How Low Can You Go: Selling Out Taiwan To Settle U.S. Debt With China?

noreply@blogger.com (Static Chaos) — Sat, 12 Nov 2011 13:20:00 -0800

Static Chaos

Post-Lehman and after the Too Big To Fail Wall Street banks were ultimately bailed out by the American taxpayer, Moral Hazard was cited as a major systemic risk to the global financial system. Three years later, a NYT OpEd piece has managed to potentially take Moral Hazard to the next level -- the fiscal and ethical system of the U.S. government.

From NYT written by Paul V. Kane (emphasis mine):

"With a single bold act, President Obama could correct the country’s course, help assure his re-election, and preserve our children’s future.

....He should enter into closed-door negotiations with Chinese leaders to write off the $1.14 trillion of American debt currently held by China in exchange for a deal to end American military assistance and arms sales to Taiwan and terminate the current United States-Taiwan defense arrangement by 2015."

Kane then went on to pat himself on the back that

"This would be a most precious prize to the cautious men in Beijing, one they would give dearly to achieve."

For those unfamiliar with this part of U.S. foreign policy history, here is a quick rundown excerpted mostly from Wikipedia:

The Taiwan Relations Act (the TRA) is an act of the United States Congress passed in 1979 under President Jimmy Carter after breaking the relations with the Republic of China (ROC) - Taiwan to establish diplomatic relations with the People's Republic of China (PRC).

While not recognized as "the Republic of China (ROC)", Taiwan is to be treated under U.S. laws the same as "foreign countries, nations, states, governments, or similar entities" under the TRA. The TRA also requires the United States "to provide Taiwan with arms of a defensive character", and "to maintain the capacity of the United States to resist any resort to force or other forms of coercion that would jeopardize the security, or the social or economic system, of the people on Taiwan."

U.S. administrations have since sold arms to Taiwan in compliance with the Taiwan Relations Act despite protests from Beijing. The TRA does not require the U.S. to intervene militarily if the PRC attacks or invades Taiwan, and the U.S. has maintained a "strategic ambiguity" in that scenario. However, a July 2007 Congressional Research Service Report confirmed that US policy has not recognized the PRC's sovereignty over Taiwan.

From the bio at NYT, Kane is "a former international security fellow at the Harvard Kennedy School, is a Marine who served in Iraq." As leaned as Kane might be, it is a serious stretch even for him to have come up with such a "creative solution" to America's debt problem, by selling out another government, which has very little to do with the debt agreement between China and the U.S. to begin with, breaking enacted U.S. laws all through "closed-door negotiation" with Beijing, without a single regard and consult to Taiwan.

Furthermore, Kane's proposal is essentially the epitome of Imperialism much despised by the West in that using Taiwan as a leverage to settle the U.S. debt owed to China, thus implying Taiwan as a piece of property owned and could be "traded" by the United States in a debt settlement negotiation.

Inter-country courtesy and decency to Taiwan aside, Kane's suggestion is just plain wrong on so many levels. It is ironic how the Arab Spring is overthrowing autocratic governments and leaders left and right, yet Kane has regressed to the opposite as to recommend President Obama basically bowing, symbolically as well as physically, to China, which is still largely autocratic despite recent progress, all for a quick trillion bucks.

Kane has also worked out the math for China:

"A deal for the resolution of Taiwan’s status could save China $500 billion in defense spending by 2020 and allow Beijing to break even by 2030, while reducing America’s debt and serving our broader economic interests."

Where do you think China would put the $500 billion saving in Taiwan defense? Hint: Beefing up the defense (think nuclear) against the U.S. would be a good guess!

Kane's conclusion:

....By tackling the issue of Taiwan, Mr. Obama could address much of what ails him today, sending a message of bold foreign policy thinking and fiscal responsibility that would benefit every citizen and be understood by every voter.

I'm sure the world community would be thrilled to learn that Obama's "bold foreign policy thinking," "fiscal responsibility," and his re-election all hinge on a tiny island with a population of mere 23-million. Seriously, how low can you go?

Prep School Scam: Chinese Students Exploited by Endowment-Hungry American Schools

noreply@blogger.com (Static Chaos) — Sat, 22 Oct 2011 17:30:00 -0700

Static Chaos

With growing wealth and the long cultural belief that values higher education above almost everything else, it is easy to understand why more and more Chinese parents want to send their kids to the United States hoping to get a better education leading to a brighter future.

This trend has created a strong, yet hard to fill niche demand. As we learn from Econ101, someone (an agent, for example) will eventually squeeze out some supply from somewhere to meet that demand, along with a potential to exploit the gap when the good quality supply falls short of demand.

According to Bloomberg,

"...[U.S.] Colleges are prohibited from paying incentives to recruit U.S. students who qualify for federal financial aid. While American schools use agents worldwide, the practice is especially common in China because agents are ingrained in its culture."

In their quest for a world class education in the U.S., some Chinese students as well as parents have been exploited by some of the American schools hungry for endowments in an economy still reeling from the Great Recession. From Bloomberg:

"Boarding schools with small endowments and less selective admissions policies are boosting their revenue and enrollment by recruiting thousands of Chinese students who pay full freight. As the weak economy has shrunk the pool of well-off U.S. applicants, many of these schools are using agents with misleading sales pitches to tap a growing number of wealthy families in China eager for the prestige of an American degree.

The number of Chinese students at U.S. private high schools soared more than 100-fold to 6,725 in 2010-11 from 65 in 2005- 06, according to the U.S. Department of Homeland Security. China has displaced South Korea as the top source of international students at boarding schools, with the smallest schools having the biggest increases in Chinese enrollment, said Peter Upham, executive director of the Association of Boarding Schools in Asheville, North Carolina.

In addition to agency's cut, Bloomberg quoted a couple of schools that these Chinese families paid first year tuition in the $55,000 range, plus additional international student fees such as English as A Second Language (ESL) classes. A headmaster at a New York school says,

"The ESL fee is justified because classes are smaller, and price isn’t an issue because China has a lot of multimillionaires."

But instead of the promised elite college-prep experience by agents, these Chinese students often find that over-enrollment of Chinese students has resulted in one-third or more of their dorm mates are also Chinese, which is non-conducive to their English leaning and studying progress, while many of the U.S. students in the same schools have leaning disability / difficulties such as ADHD or ADD. Reportedly, these conditions were not disclosed to the Chinese families since the disclosure would be “counter-productive,” as one school puts it.

So with this strange student demographic mix, the end result has turned out to be quite interesting:

"The schools end up segregated academically and socially into full-paying Chinese students, many of whom rise to the top of their classes, and American teenagers who fell behind in public schools."

Meanwhile, Bloomberg describes how parents in China are clamoring to pay up to $300 USD a pop to just learn about prep-school education in the U.S. And Chinese student enrollment remains a big "budget balancer" to many prep schools, as another headmaster at a school in Connecticut told Bloomberg that

“You can turn the valve on and off.... If you need another 20 kids at 50 grand a pop, you get them from China.”

Since this is a commercial activity in the traditional mostly "non-profit" education sector (which is a total joke if you look at how much tuition and book costs have gone up over the years), there's no clear governing standard or regulation around the student recruiting and enrollment diversity, which is unlikely to change any time soon.

So unfortunately, the best thing the Chinese families wanting to send their kids to the U.S. could do is "buyer beware" by doing a lot of research and on-campus visits if possible, so not to waste precious time, money or worse yet, disrupt the education progress of your young.

Static Chaos

Provoking China: Selling F-16 to Taiwan or The Currency Bill?

noreply@blogger.com (Static Chaos) — Tue, 11 Oct 2011 20:23:00 -0700

Monday, Oct. 10 marks the 100th anniversary of the Xinhai Revolution that ended the Qing Dynasty as well as 2,000 years of Imperial China. Sparks have always been flying in the Taiwan Strait between Taiwan and China with the latest being the F-16 fighter planes Taiwan wanted to buy from the U.S.

From an op-ed piece by Bloomberg editors:

"The U.S. is obligated by a 1979 law to supply weapons to Taiwan, whose government broke from mainland China in 1949 after the Communist Party came to power. Taiwan had wanted the U.S. to sell it 66 newer versions of the aircraft, and leaders of both parties in Congress pressured the administration to do so. China objects to any arms sale to Taiwan."

".....selling new planes to Taiwan might have needlessly provoked China, a vital U.S. trade partner."

".....The last thing needed is outside provocation. So we applaud the Obama administration’s compromise decision last month to go ahead with a $5.85 billion deal to upgrade Taiwan’s existing fleet of F-16 fighter jets."

While I also admired the diplomatic maneuver by the White House, at the same time, I could not help but find this self-contradictory in the context of the Currency Exchange Rate Oversight Reform Act (aka China Currency Bill) just being passed at the U.S. Senate, which, by the way, curiously was not mentioned or referenced in the Bloomberg article. .

Does the U.S. think China will not get totally "needlessly provoked" by the Currency Bill? Think again!

From Global Times:

"China's Vice Foreign Minister Cui Tiankai warned that ...."Should the proposed legislation become law, the only result would be a trade war between China and the U.S. and that would be a lose-lose situation for both sides."

From Xinhua (Chinese government's unofficial mouthpiece)

"To put it simply, current anti-yuan moves in the U.S. Senate are more like a publicity attempt to attract voters and distract attention from the real problems facing the U.S. economy."

The Bloomberg article went on to cite a a study commissioned by Lockheed Martin Corp. (LMT), who manufactures the F-16, that

"...[Selling Taiwan new planes] would have been worth $8.7 billion and created about 16,000 jobs at a time when the U.S desperately needs to reduce unemployment. The assembly line might close now that the sale is off the table."

So let me get this straight...

On the one hand, for the sake of not to "needlessly provoke" China, the U.S. is willing to not only scrap a multi-billion-dollar revenue and jobs creating commercial deal, but also skirted its own law, and broke its commitment to an ally who fought side by side with the U.S. in WWII.

On the other hand, the U.S. has no problem slapping the Currency Bill in China's face without any regards to the potential economic and geopolitical impact.

The U.S. government obviously has decided to pick its battle based on American politics. Last time I checked, when the U.S. passed the Smoot–Hawley Tariff Act in 1930, it acted only to deepen and prolong the Great Depression.

Rogers: Short Emerging Makets and NASDAQ In a Commodity Bull Cycle

noreply@blogger.com (Static Chaos) — Tue, 1 Mar 2011 15:52:00 -0800

Famous investor Jim Rogers was at Bloomberg on Feb. 28 (clip below) talking about his latest investing strategy.

'Farmers will drive Laborghini's'

Rogers has been bullish on commodities for a long time and still holds his prediction that gold will reach $2,000 in this decade, and silver will go to $50. He sees commodity is the middle of a secular bull cycle that will last for a few years.

Softs (agriculture) is in a "huge" bull market, and eventually, this shift will manifest itself in something like this - smart farmers will drive Laborghini's, while smart brokers will drive tractors for smart farmers.

Saudi Can't Increase Oil Production

He is also skeptical as to Saudi's ability to ramp up production to bridge the supply disruptions as claimed. So, that means oil prices will continue to go up; however, this time around, he suggests investors look at big name resource producers in oil companies, miners, etc. In the meantime, he said he also owns U.S. dollar.

To play the commodity bull cycle, it is best to be in "everything," but to hedge yourself, he says he is short emerging markets and Nasdaq stocks since he is uncertain about the global economy.

Static Chaos, March 01, 2011

China: A Tale of Two [Jekyll and Hyde] Videos

noreply@blogger.com (Static Chaos) — Mon, 24 Jan 2011 18:06:00 -0800

Static Chaos

China may be summarized in the following two contrasting videos - surface prosperity with dangerous undercurrents.

The first one is a 60-second film about China running at New York's Times Square from Jan. 17 to Feb. 14, meant to coincide with Chairman Hu Jintao’s arrival to the U.S. It is part of a multi-billion dollar campaign to renovate China's public image.

The second video, on the other hand, is quite distrubing, and here is WSJ's interpretation:

A boy dreams about white rabbits, representing regular Chinese citizens, living under the tyrannical rule of tigers who do nothing as the rabbits’ children are poisoned with tainted milk, who tear down their homes, who beat them, and who run them over with speeding cars—all referencing major public controversies in the past few years that have caused public outrage.

At the end of the boy’s dream, the rabbits reach the end of their patience and storm into what appears to be a government building in a bloody attack against the tigers, ripping their rulers’ heads off with sharpened teeth in a melee of animated gore.

OK, then. Anyone interested in the translation may find it here.

Static Chaos

New Tension Between North & South Korea Rattles The Market

noreply@blogger.com (Static Chaos) — Tue, 23 Nov 2010 22:48:00 -0800

By Static Chaos

U.S. stocks dropped more than one percent on Tuesday with two Korea's exchanging fire adding to the already worrisome Irish debt crisis in Europe.

The latest with Ireland is that European Union (EU) officials estimate that a rescue package may amount to about 85 billion euros ($114 billion). That news sent S&P issuing a new downgrade on Ireland's sovereign debt.

However, Ireland (along with Spain and Portugal, etc.) has mostly been factored in, so the new development in Korea is what really jolted the market (or some may say the market is dying for an excuse to correct.)

The latest conflict between North and South Korea could be counted as one of the most dramatic confrontations since the Korean War in 1953.

Based on Seoul's account, it all started with North Korea warning the South to halt military drills near their disputed sea border. The South, naturally did not comply, and the North retaliated by shelling the small island of Yeonpyeong (clip below).

According to AP, Seoul responded by unleashing its own K-9 155mm self-propelled howitzers and scrambling fighter jets. Two South Korean marines were killed and 15 troops and three civilians were also injured. There are no confirmed casualties from North Korea yet.

The communist side warned of more military strikes if the South violates the maritime border by "even 0.001 millimeter," while South Korea vowed "massive retaliation" should North Korea attack again.

This confrontation came on the heel of another conflict. In March, North Korea was blamed for attacking and sinking the South Korean warship Cheonan while on routine patrol, killing 46 sailors. The North denied responsibility.

The U.S. reacted by President Obama issuing statement "strongly condemned the attack" and that the U.S. “stands shoulder to shoulder” with South Korea on this. Meanwhile, China--still neck-deep in a similar border dispute with Japan and other neighboring countries--issued a relatively indifferent "call for calm" statement.

I've seen "World War III" and "Gulf War III" mentioned in some news articles over this event, but believe it is an unlikely scenario. A Korean War II serves nobody's interest, including North Korea. And I imagine China is fully aware of how much disruption a Korean war II would bring to its economy.

On the other hand, I would be more worried about a third Sino-Japanese War, since there's a fresh stand-off between Chinese and Japanese patrol boats just past weekend near their disputed islands.

China is indeed Korea times 1,000 or worse when it comes to size and fire power, not to mention the feud with Japan runs deeper than the one between the two Korea's.

So, it seems King Dollar still reigns supreme as long as there's a faintest threat of war and chaos, which will likely give people such as Joe Weisenthal an excuse to continue praising QE2 Is Not Bad For the Dollar.

Google Got Flak Over Leaked Diaoyu/Senkaku Sino-Japanese Boat Clash Videos

noreply@blogger.com (Static Chaos) — Thu, 11 Nov 2010 03:01:00 -0800

By Static Chaos

The video of the infamous collision between Japanese coastguard vessel and a Chinese fishing boat off the disputed Diaoyu or Senkaku Islands in September was recently leaked and surfaced on YouTube (below).

From the YouTube video, the Chinese fishing boat--Minjinyu 5179--collided twice with Japanese coast guard ships Yonakuni, and another collision with patrol boat the Mizuki. The whole footage was 44-minute long, and only the actual collision part is posted here.

The video looks like was taken from the Japanese coastguard boat, and had previously only been shown to Japanese Prime Minister Naoto Kan, security officials and some lawmakers, but not released to the public. Japanese foreign minister Seiji Maehara told a parliamentary committee that the Japanese government would investigate the leak.

Chinese Foreign Ministry spokesman Hong Lei said that the collision had occurred because the Japanese coastguard was undertaking "illegal operations" within Chinese territorial waters in the East China Sea. "The so-called video cannot either change such a fact or cover up Japan's illegality," Hong said in a statement on the ministry's website.

From the news coverage I've read so far, most marine experts believe these leaked videos do not establish that the Minjinyu 5179 deliberately rammed the Japanese ships.

Meanwhile, Google's got flack in Japan over these leaked videos as well. Tokyo prosecutors have seized Google's records in order to investigate how the leak managed to happen.

Some worried that this could reignite more tension and dispute, but I personally don't think things could get any worse regardless of these leaked videos.

Curious Crude Oil & Silver Market Actions Warrant A CFTC Investigation

noreply@blogger.com (Static Chaos) — Sat, 6 Nov 2010 12:28:00 -0700

Once again we find some strange activity occurring in these markets from a trading perspective, and it is time that the increased staff and resources of the CFTC enforcement division look into these two markets in particular.

Curious Crude Action After Pit Close

Let`s start with crude oil.

After the pit closes each day at 1:30 CST, the crude oil market is thinly traded and it is at this time within a relatively low volume trading environment, that crude oil is being dramatically manipulated up each day.

So price wouldn`t trade at these levels when you have the full complement of buyers and sellers and a competitive price market discovery process during each day. However, after the pit closes, and markets are relatively illiquid, all of the sudden price levels that would not typically hold are boosted upward by as much as .50 to .75 cents each day in late electronic trading from 1:30 to 4:15 CST.

This is how the Crude Oil market is being manipulated upward by a relatively few number of market participants, and this practice should be investigated by the SEC.

The Infamous Silver Market

The next market to look at is the infamous silver market which has had a long history of being manipulated by a few market participants in pursuit of outsized gains. Just recently two traders filed separate suits against JP Morgan and HSBC alleging that these two firms artificially manipulated the price of silver down with collaborating trading activities utilizing enormous short positions in futures and options contracts on Comex. For example, in August 2008 Silver moved from $14.86 to $12.23 in one day, an 18% drop.

This is nothing new. The Hunt brothers in the 1980`s tried to corner the Silver market, thinking inflation was a real concern, but they used anti-competitive practices by buying over $ 1 Billion worth of silver purchases through physical and futures contracts, and then taking delivery and storing the commodity of their futures contracts, thus artificially taking huge amounts of supply off the market, creating a bubble in the commodity which didn`t reflect the true fundamentals of the market.

Big Banks Move on Silver

Well, the big banks are at it again as silver on Thursday had a nearly 8% increase after already moving up considerably earlier in the week. Silver has gone from $23 an ounce to$26.75 an ounce in two weeks. The price action is obviously indicative of a one-sided market where the major market participants being the big banks are goosing the market up well beyond any underlying fundamental basis for this rise in prices.

In the silver market there are not a widely diversified set of market participants, and heavy collusion on behalf existing market participants, whether intentional or just of being of like mind, is creating major price distortions in the market.

The SEC needs to enforce position limits on these big banks with their exposure to the commodity as their presence is artificially creating another bubble market in Silver, with price reacting strictly to money inflows rather than market fundamentals of supply and demand of the commodity in the marketplace.

Dollar Not a Factor in Price

And to those that think these money inflows were directly correlated to the dollar weakness, the dollar was actually strong on Monday November 1^st, and Friday November 5^th. And yet these two commodities continued to rise due to speculative money inflows.

It is time the CFTC addresses some of these manipulative market practices on behalf of the investment banks and large institutions as price distortions and artificially inflated price movements that don`t match the underlying fundamentals of supply and demand cause real damage to the economy.

After all, crude oil inventories and their associated products are well above their 5 year averages based upon the true fundamentals of the marketplace, and yet some elderly person on a fixed income has to pay 15 cents more per gallon of gasoline in two weeks time just because Goldman Sachs needs to hit their $20 Billion bonus pool target for 2010 and juices up the price of crude oil as a means to that end.

Static Chaos

China Furious at The Nobel Peace Prize Award

noreply@blogger.com (Static Chaos) — Fri, 8 Oct 2010 14:18:00 -0700

By Static Chaos

Jailed Chinese dissident Liu Xiaobo (劉曉波) won the 2010 Nobel Peace Prize on Friday for "two decades of non-violent struggle for human rights". China is totally livid and called the award "an obscenity" as reported by Reuters.

The chairman of the Norwegian
Nobel Committee,
Thorbjoern Jagland, holds up a
photograph of Liu Xiaobo

Liu Xiaobo, a former literature professor, was initially detained on December 8, 2008 due to his participation with Charter 08, a manifesto to promote political reform and democratization in the People's Republic of China. He was subsequently sentenced to 11 years in jail. More than 8,100 people inside and outside of China have signed Charter 08 since its release.

Beijing, who had warned the Nobel Institute against granting the prize to Liu this summer, immediately summoned Norway's ambassador to protest. Foreign Ministry spokesman Ma Zhaoxu declared in a statement "This is an obscenity against the peace prize."

Reportedly, CNN and BBC broadcasts in Beijing were cut when the prize was mentioned. Liu's wife Liu Xia told Reuters Chinese police was taking her to Liu Xiaobo's prison in northeastern China to prevent foreign reporters speaking to her.

The West, including Britain, France, Germany, the European Union, and the United Nations, although congratulated Liu, were all very careful to avoid saying anything sensitive that would upset China.

"Peace, Self-perseverance, A Strong China" was the final wish of Dr. Sun Yat-sen (孫中山) before he had a chance to fully implement the Three Principles of the People (三民主義) - Nationalism (民族), Democracy (民權) and the People's Livelihood (民生).

Judging from the muted reactions from the Western world, it appears China is finally getting stronger after centuries plagued by foreign invasions and internal turmoils. However, the newly minted status also has come with a huge price tag of Democracy and People's Livelihood - two of the Three Principles.

And if history is of any indication, no country and/or political system would last long without all three principles as part of its foundation.

Video Source: Reuters

U.S Government Tops in User Data Request - 4,287 in Six Months!

noreply@blogger.com (Static Chaos) — Wed, 22 Sep 2010 17:17:00 -0700

In one of my posts published in April this year, I briefly mentioned that Google unveiled a “transparency tool” that gives information about requests it receives for user data or content removal from government agencies. The government data is recorded from around the world in an effort to shed light on censorship and flow of information according to Google.

As of September 2010, the Google Transparency Report includes information on government requests from the 12 months beginning July 2009 and ending June 2010.

In the first six-month period--July 2009 to Dec. 2009--Brazil ranked number 1 as the country with the most government data requests - 3,663, while the United States was at a close second place with 3,580 requests.

The most recent data set--Jan. 2010 to Jun. 2010--the U.S. reign supreme this time around with 4,287 data requests, up almost 20% (see graph). Meanwhile, the defending champion--Brazil--dropped to the second place with 2,435 requests, down 34%. India, UK and France finished out the top five.

Here are some definitions according to Google (emphasis mine):

What do the numbers represent?

These numbers represent the requests we received from government entities for the removal of content or the disclosure of user data in six-month blocks..... Because of the complexity of these requests, the numbers we are sharing do not reflect the total number of accounts subject to data disclosure requests by governmental agencies. Also, this report doesn’t indicate whether Google complied with or challenged any request for user information, although we do provide percentages about our compliance with requests to remove content.

While this info is far comprehensive, it is worth noting the 20% increase the U.S. contrasting with the huge 34% drop of Brazil. This would suggest a positive evolvement for the Brazilians. However, for the U.S., it seems to indicate one (or a combination) of the following:

A reversal of freedom fortune
Heightened suspicious Internet activities
Too many workers on the the Federal payroll with too much time on their hands

Well, since Reuters reported "more than 120 former or retired military personnel points to an ongoing and alarming intervention by unidentified aerial objects at nuclear weapons sites, as recently as 2003," I would not rule out number two.

However, I personally think it is a combination of all three, but mostly Factor #1, in light of the course of policy development since President Obama took office. In any case, regardless of the possible mitigating factor, this is definitely the wrong direction for America and bad news for Americans.

Static Choas, Sept. 21, 2010

A Third Sino-Japanese War?

noreply@blogger.com (Static Chaos) — Sat, 18 Sep 2010 18:29:00 -0700

For centuries, the relationship between China and Japan may be best described as tense to turbulent with two Sino-Japanese wars all within the last century or so. The accord between the two neighboring Asian countries has progressed in recent years with official visits, trade pact and joint venture agreements.

Fishing Boat Incident & Border Dispute

However, the fuse was lit again this month when Japan seized a Chinese fishing boat near a disputed island chain in the East China Sea and the subsequent arrest of the captain. Japan government believes he intentionally rammed two Japanese vessels during a high-seas chase on September 7.

The islands in dispute--called Diaoyu in China, Senkaku in Japan-- are also claimed by Taiwan. They are uninhabited, but believed to have oil and gas deposits, and on rich fishing grounds.

This has escalated to the worst tensions in years between the top two economies in Asia. Beijing is furious, and had summoned Tokyo's ambassador five times in a week while scrapping talks over a joint energy exploration project in the East China Sea.

An Eerie Reminder of The 9-18 Incident

September 18th History Museum
in Shenyang, China (via Wikipedia)

Curiously, either by coincidence or by orchestration, this fish boat/border incident is an eerie reminder of the 9-18 Incident. The 9-18 Incident (九•一八事變) or the Shenyang Incident (瀋陽事變), is mostly referred to as the Mukden, or Manchurian Incident by the West and Japan.

For people unfamiliar with this part of the world history, the 9-18 Incident was a border dispute escalated into a military conflict between China and Japan on Sep. 18, 1931.

The 9-18 Incident took place near Shenyan City in Northern China, when the Imperial Japanese Army accused the Chinese of bombing a section of railroad owned by a Japanese company. It resulted in Japan taking over all major cities in three provinces of Northern China and setting up the puppet state by the Last Emporer of China - PuYi.

Saturday, September 18, 2010 is its 79th anniversary.

Currency War Already Waged

Actually, the fuse between the two countries was already getting shorter when China started buying Samurai bonds this year heading for a record annual increase. This propped up the yen, at a time when Japan--70% export dependent--is struggling with a slowing growth and a decade-long deflation.

In an article dated Sep. 9, Bloomberg BusinessWeek reported Japan’s government said it will seek discussions with China over the record purchases of Japanese bonds.

However, instead of a discussion, Japan initiated its first unilateral yen intervention in six years on Sep. 15. The surprise move immediately sent the US dollar, and the dollar-pegged Chinese yuan higher.

Network Hacking War – Not Yet

With the fish boat border dispute erupting so close to the anniversary of the 9-18 Incident, emotions are running high in China (as well as in Taiwan.) In addition to organized protests around mainland China, both Chinese and Japanese media reported Honker Union of China ((中國红客) had called on its members for a mass network attack of Japanese government sites.

Honker Union of China was formed in 2001 after a group of hackers brought down thousands of US websites in response to the collision of a US spy plane and a Chinese fighter jet over the South China Sea. The group is believed to have 12,000 members.

Some were anticipating a big showdown between the Chinese and Japanese hackers. However, China Hush reported that it was apparently a rumor as Honker Union of China posted a public notice on its web site denying a planned mass hacking attack against Japan.

(English translation courtesy of China Hush)

"The real war on the networks has no smoke and fire....Any attack will be executed silently, rather than vigorously promoting it.”

China Hush also noted “Some said the rumor actually came from Japanese media, and it was deliberately reported to make China look bad…” Again, eerily similar to the Shenyang Incident seventy-nine years ago, where most believe the railroad sabotage was staged by Japan as a pretext for war.

History Repeating Itself?

The 9-18 Incident, which started not that differently from the recent tussles between China and Japan, is generally considered as the event officially unveiled the Second Sino-Japanese War (抗日戰爭) from 1937 to 1945, a very sad and cruel chapter of China's history, which has remained mostly very little mentioned and grossly under-represented in the Western and Japanese versions of the history book.

One would think Japan has enough on its economic front and would try very hard not to risk provoking China, which is an entirely different country from that of 79 years ago. But as the old saying goes, history tends to repeat itself with a short memory. The difference is that today’s interconnected world has made a full-blown actual military assault between two countries a less likely scenario.

Rather, the war between countries will be fought through currency and/or other monetary instruments, and stealth tech as intimated by the Honker Union’s message.

Static Chaos, Sept. 18, 2010

China Turning Up The Heat On Bordeaux Futures

noreply@blogger.com (Static Chaos) — Wed, 15 Sep 2010 14:42:00 -0700

Booming demand from emerging economies--especially China-- in addition to near-perfect weather in western France, is sending prices of Bordeaux soaring 28% within a one-month time.

WSJ reported that Château Lafite Rothschild's 2009 Bordeaux began its advance sales in early July at $18,000 a case. They were sold out in four days and the same case now is going for $23,000 (see graph from WSJ).

WSJ indicated some Hong Kong investors, betting on China’s wine thirst, are speculating in wine futures thus driving up huge price increases. Here is the tip bit from WSJ on the Bordeaux futures:

"Bordeaux's top 200 or 300 wineries use a system called sale en primeur, or presale, for part of their product. Early each summer, they exchange futures contracts with middlemen known as negotiants, who then sell the wine contracts to collectors, investors and fine-wine retailers."

That means, for the elite 5% of Bordeaux wineries, futures contracts are exchanged while a vintage is still in barrels. So, this 2009 Bordeaux won't be bottled until next year, at the earliest. And prices are expected to climb even further, 440% in one example cited by WSJ, after a wine is bottled.

WSJ quoted Council of Bordeaux Wine that volume of Bordeaux exported to China had grown 39 fold from 2000 to 2009, and was up 97% and 40% year over year, by volume and value respectively, in 2009 alone. Last year, China also passed the U.S. to become Bordeaux's biggest export market by volume outside Europe, and is considered the most important market, even before France, by some wineries.

According to the International Organization of Vine and Wine (OIV), China’s wine producing capacity is also growing alongside its love for spirits, China now is the world's sixth biggest wine producer, edging out Australia. Its potential is drawing elite vintners like Spain's Torres and France's Lafite.

In China, wine has become a status symbol of the hip urban lifestyle. Newly affluent and brand-conscious Chinese consumers flock to Bordeaux as red wine is associated with good health, and the color red traditionally signifies luck and fortune in Chinese culture.

Another factor of Bordeaux’s popularity--the combination of the massive population and finite food sources (food-for-wine) has prompted Chinese government to announce a policy of reducing the production of rice-based alcohol, a long-standing tradition in China.

Feeling tempted to dabble in wine investment? Bacchus Partners, LLC is the first and only wine investment fund in the U.S. However, wine may seem like an attractive investment at times, as an asset class, it remains speculative, complicated and not as well-developed as an investment option. So, it is most likely best for someone with a sizable net worth looking for diversity into the exotics. Average investors probably should put money into other more conventional investments, or you might find yourself drinking down losing investment more often than not.

Static Chaos

A Little Rice Wine Spat: Taiwan vs. U.S. and EU

noreply@blogger.com (Static Chaos) — Sun, 5 Sep 2010 16:31:00 -0700

By Static Choas

Taiwan, (aka The Republic of China, ROC), the tiny island just across the Strait from China-- found itself taking considerable heat from the United States and European Union (EU)—two biggest exporters of alcoholic beverages to the Taiwanese market--over a planned tax cut on its locally brewed rice wine.

As Asia Times reported, both Western governments allege that the local liquor will become an unfair competitor to imported whisky, cognac and brandy after the tax cut. The US and the EU consider Taiwan's move a violation of the World Trade Organization (WTO) regulations and have threatened to file a WTO case against Tawian.

There’s a classification issue as the WTO classifies liquor by its alcohol level, while the Taiwanese government is trying to define by the way it is consumed. And in its defense, the Taiwanese government maintains that the rice wine is a common cooking ingredient, mostly not consumed as an alcoholic beverage in Taiwan, and therefore should be exempted from the high taxes aimed for liquors.

Taipei reportedly commissioned National Taipei University to conduct a study, which found that 96.4% of rice wine was consumed as cooking wine in Taiwan. However, Washington and Brussels are not buying it…figuratively and literally.

As battle clouds are gathering at the WTO, it seems high time for some quick cross-cultural understanding ….. on rice wine.

Since I had lived in Taiwan for a number of years, I can say with a degree of certainty that, unlike Japanese sake and Korean soju, both of which are also made from rice, Taiwanese rice wine is indeed used predominantly for cooking, as it is an ingredient in almost every recipe. In fact, rice wine is such a cooking staple that it is hard not to see a bottle sitting on the kitchen counter at a house or restaurant, often right next to cooking oil, soy sauce and salt.

And yes, there are some in Taiwan who also drink rice wine in addition to using it in cooking, but they are far and few in between, and mostly of relatively lower income levels, as noted by the National Taipei University’s study.

So, in short, the size of the rice wine drinker is too small, and in an entirely different demographic, social and economic segment, to even remotely have any impact on the likes of cognac or brandy.

Although Taiwan has had a robust economic growth this year after the global recession with expected Q2 GDP growth around 12.53%, its wine market size is quite small on the global scale. According to Research and Markets, the size of Taiwan’s alcoholic drinks market was around $4.4 billion in 2008—about 2,7% of the American wine market.

As such, any kind of monetary loss that could possibly result from the rice wine tax cut would be like less than a drop in the bucket. So it seems odd that the U.S. and EU would choose to go head-to-head with a long-time ally like this.

An editorial by the China Post suggested reasons beyond a simple misunderstanding of Taiwanese culture—worries of the Taiwan tax cut will set off an Asian liquor tax cut spree and they don't want to make Taiwan an exception. (Japan and Korea, in the past tried a similar argument with their sake and soju to no avail.)

For EU, my personal speculation is that Taiwan recently won its first WTO dispute against the EU over LCD flat-screen panel tariffs, reportedly saving island exporters up to $611 million a year, so it seems not that far off to say there could be a bit quid pro quo involved, since Taiwan’s rice cooking wine could not possibly touch the high-end spirits from France, Italy and Spain, etc.

Moreover, this could also be related to the new trade pact-Economic Cooperation Framework Agreement (ECFA ) --signed in June between China and Taiwan after 60 years of separation and political differences/hostilities. With Taiwan and China both playing a significant role in world trade, ECFA has drawn the attention of many WTO members. The China Post reported that the ECFA is likely to formally take effect and be implemented in September after an exchange of instruments between Taiwan and China.

As for Taiwan, Asia Times quoted an unnamed officials of the Taiwan Tobacco and Liquor Company that the tax cut by President Ma’s party was aimed at appeasing Taiwanese voters in the low-income classes—the rice wine drinker audience and mostly supporters of the opposing Democratic Progressive Party (DPP) --at least through the important five special municipality elections to be held later this year.

Meanwhile, Taiwan’s Ministry of Economic Affairs reportedly is working on a presentation to prove to that the rice wine in question is mainly a cooking ingredient; the rice wine does not affect the sales of Western liquors like scotch and brandy.

Good luck with that as it is quite obvious that this seems far beyond just a cultural exchange on wine use.

Static Chaos

Mega Private Equity Deal in 2010: Some Fundamentals in Place

noreply@blogger.com (Static Chaos) — Sat, 21 Aug 2010 17:32:00 -0700

By Static Chaos

With Merger and Acquisition really picking up steam in the last month, the question arises whether private equity will be able to complete a major move in the remainder of 2010. This past week Intel acquired software security firm McAfee for $7.7 billion in an all cash deal and the prior week BHP offered $40 Billion to take over Potash Corp. from shareholders.

In contrast, the latest deal involving private equity--Blackstone acquiring Dynergy for $543 million--is a far cry from the heyday of private equity deals back in 2006, when deals such as Harrah`s Entertainment, Hospital Corp. of America, Clear Channel Communications, Kinder Morgan, and Freescale Semiconductor each worth more than $17 Billion dollars took place. In 2007, Blackstone acquiring Equity Office Properties Trust for $38.9 billion, and TXU went for a $42 Billion three way deal with Goldman Sachs, Kohlberg Kravis Roberts, and TPG.

So, all this M&A activity begs the question--where the heck is private equity? Can they still compete with large companies sitting on a pile of cash?

I understand the financing travails and the freezing up of the credit markets in 2008, but this is late 2010 and supposedly private equity has all this money from investors that they have been unable to utilize for deals over the last three years. In short, what could private equity be waiting for?

There are some great bargains out there in undervalued companies that have huge cash flows, little debt, large cash stockpiles, and there is a low cost of capital right now for financing deals. Do you need an engraved invitation to the ever-present M&A party? If you cannot complete a major deal now, then when will you be able to do a major deal?

The cost of capital is only going to go up in the future, in a major way. Frankly, it seems that the private equity community is like the proverbial deer in headlights, and still stuck in the malaise, fear, and uncertainty of the past three years that they are slow to react to the changing landscape of deal making. And this is their core business deal making.

It is apparent that the dynamics have changed in the private equity buyout game, and maybe the firms are waiting for the good old days. But the good old days are long gone, and you have capital to deploy, so you’d better either start adapting to the new environment or start giving your capital back to investors so they can realize a better return on their money.

There is the stigma of all those bad private equity sham deals that have occurred over the last decade that probably makes many banks weary of private equity when they inquire about financing deals. So, yes the days of the sham deals are over where you buyout some garbage company that has a declining business model, uncompetitive business, but little debt, and you take it private, lever up the balance sheet with monstrous debt obligations, pay yourself a huge dividend recapping your original investment, and then taking it back public in a better market with higher multiples. The reason this type of deal is dead is because there will always be a bag holder, and banks have ultimately been caught in the crossfire too many times as the one picking up the pieces in the end.

Most likely, all future private equity deals will involve more of the firm`s own money in the deal. But private equity, by most accounts, has been sitting on large amounts of capital, so the money is there for deals. Furthermore, there are plenty of legitimate value enhancing, highly attractive deals out there, which this cash may be applied to right now, as there are great fundamentals (outlined below) in the marketplace for the private equity model.

The valuations of many public companies are well below the average of the last 10 years.
There are many solid companies that have little debt on their books.
Many companies with strong cash flows.
The cost of capital is extremely attractive at these rates of financing, providing banks believe that private equity firms have some skin in the game and willing to share the risk. But this should have always been the model, as shared risk inevitably leads to high quality deals and not the sham deals where risks are absorbed by others.
The M&A cycle for the next 10 years is just starting, so the best deals are still available.
The next cycle will be highly inflationary, which means you are taking assets out of the market at the bottom of a deflationary cycle, and bringing these same assets back to the public markets in three years in the midst of an inflationary cycle where the value of the same assets receives a much higher multiple due to the inflation of asset prices.
Banks have recapitalized for the past three years, and they now need to start applying more of their capital base to lending projects with higher returns, they just need the demand component to pick up, and this is where private equity firms come into fill this void.

So, how likely is it that we have a$100 Billion private equity deal in the remainder of this year? Well, at the beginning of this year it would have seemed impossible, but the dynamics are there for a deal to occur. Things really just have to fall into place. With the latest rumblings of M&A activity, there is an increasing chance that we witness a Mega Private Equity deal that really shakes up the current valuation models regarding what public companies are worth.

A case in point is a company like HP with a trailing P/E around 11, has solid growth, leader in numerous business segments within technology, sits on a large amount of cash, and is grossly mispriced in the market place compared to a firm like Dell with a trailing P/E around 16.

HP has many of the components necessary for a private equity mega deal, solid company with a bright future, extremely low multiple, assets are worth more than the current market cap if sold separately, low relative debt, strong cash flows, large cash reserves, relevant industry due to demands from corportations to increase productivity, lacks a CEO, leverageable, and most of all--very financeable for a major deal to banks.

This is one of my candidates for a Mega Private Equity deal. What are some of the companies that you think will make for great Mega Private Equity Deals for the remainder of 2010?

Disclosure: No Positions

New Jersey With The Luck Of The Irish

noreply@blogger.com (Static Chaos) — Thu, 19 Aug 2010 14:02:00 -0700

By Static Chaos

One of the headline news today was that New Jersey became the first U.S. state sued by the Security Exchange Commission (SEC) for security fraud. Here is the low-down according to WSJ (my summary):

The SEC cited the case involved municipal bonds in 79 separate offerings totaling $26 billion from 2001 to 2007 where the state didn't disclose it had abandoned a five-year plan to fund the pension plans. The filing described NJ used a series of accounting maneuvers to create an illusion that it was funding the two pensions totaling $62 billion, when it actually was just moving money around, and alleged misled investors.

Now, here comes the part about the Irish Luck (my summary based on NYT)

SEC settled its suit with New Jersey by issuing a cease-and-desist order, which the state accepted without admitting or denying the findings. No penalties were imposed. Neither individual, nor the bond underwriters was charged. New Jersey’s largest bond underwriters during the period in question include Citigroup, J. P. Morgan Securities, Morgan Stanley, Bank of America, Merrill Lynch, Goldman Sachs and Barclays Capital.

So basically, New Jersey pulled an Enron accounting trick without any consequences. Can you imagine any corporations or private citizens would get off this easy? Some fines or penalties have got to be involved, at the minimum, and some employee(s) and the underwriters would be charged as well.

Well, as it happens, SEC currently has authority over companies regarding disclosure, but with munis, all it can do is bring a case if it suspects fraud. Furthermore, no investors appeared to have been harmed, and imposing any sizable fines and/or penalties would probably bankrupt New Jersey. So this most likely explained why NJ got just a little slap on the wrist. (By the way, The SEC has asked Congress for expanded authority.)

However, what's more worrisome is that WSJ noted that

"States as a whole face a trillion-dollar gap between the pensions, health care and other retirement benefits they have promised to public employees, and the money set aside to pay the benefits, according to a report by the Pew Center on the States. The SEC said it is concerned about how these problems are disclosed to investors."

Chart Source: WSJ.com

With New Jersey as a precedent, muni investors probably should not expect too much accountability and protection from the SEC.

In Defense of the HP Board

noreply@blogger.com (Static Chaos) — Tue, 17 Aug 2010 14:27:00 -0700

By Static Chaos

The HP board has taken a lot of heat for their decision to vote out CEO and Chairman Mark Hurd. But the HP board had no other choice in the matter. Some of the confusion surrounding the Mark Hurd saga is the fact that the media is looking for some bigger story than there actually is, after all, controversy sells in their business. Moreover, Mark Hurd who is trying to conduct spin and damage control to save his future corporate career is making a pretty clear cut, necessary, and deserved firing look more mysterious than it actually is. This is a no-brainer, and every board, including Larry Ellison`s would have come to the same conclusion: namely, Mark Hurd had to go.

In almost every account there is a lot of confusion about what really happened. The reason for this is that these are sensitive topics, and corporations have to utilize certain discretion when discussing the events regarding his resignation. But I have read enough about the case, and am pretty good at filtering through the politically correct corporate speak framed by high paid lawyers.

Here is essentially what happened: Mark Hurd had an affair with an event contractor for HP, it ended badly, she was hurt, and wanted to get even with him, so she filed a sexual harassment claim against Mark Hurd and HP. When HP looked into the merit of the claim, they noticed that this event contractor was paid through perks and other means a larger salary than normal for said job duties. This is a major problem for HP and the board. Hurd used his position to show favoritism towards an employee who he had an affair with.

Then Mark Hurd tried to cover up his affair and special treatment of this contractor by filing misleading and inaccurate expense reports, and other corporate reports regarding this contractor`s pay, and working schedule which he had to sign off on and approve. This is another huge red flag for HP and corporate ethics and represents a policy violation at the least. Furthermore, corporations work so hard at pushing corporate policy code of conduct training from the top down to the rank and file employees, and their CEO sets a dangerous hypocritical precedent. Again he had to go for this fact alone.

However, the ultimate reason that Mark Hurd had to go is that he put HP in a bad position. Through his poor decision making process Mark Hurd put HP in the position of having to defend itself against a sexual harassment claim, all because Mark Hurd put himself and HP in this situation in the first place by having a relationship with an employee, i.e., “they visited each other`s hotel rooms late at night.” Yes I am reading between the lines on this statement, and so should you.

HP cannot have a CEO who puts the company in this position. The CEO gets paid a large sum of money to essentially represent the company, to set the standard for all employees to follow, to essentially represent the HP brand for Main Street. Remember this is a public company, and any CEO understands their responsibility as a CEO, and what they represent as the high profile face of the company. Plainly, HP cannot afford to have a reckless CEO who brings about sexual harassment claims due to exercising poor judgment with an employee of the company. So the only person at fault here is Mark Hurd, and the board handled this saga the way any board of a fortune 500 company would upon similar circumstances, according to the book.

The shareholders were put in a bad situation by Mark Hurd, but they should be proud of the way the board acted decisively in this case, to limit the damage, and clean the slate for a bright future with the next CEO leader with no long-term lingering damage which some CEO scandals can inflict on shareholders if not handled properly. They revealed what occurred, didn`t cover up, and made the best decision for the long term interests of shareholders. The HP board should be applauded for doing the right thing in this case, unlike Enron, Arthur Anderson and many other boards who failed to conduct proper oversight of their CEO and protect shareholders from any reckless behavior which could damage long term shareholder value.

So now the question should be resolved as to why the board fired Mark Hurd, but what about the large severance payout. Well, this is complicated by employment contracts, and the way they are worded. Plus Mark Hurd settled with the contractor, so they couldn`t gain evidence for a termination case without severance.

All in all, HP probably could have fought this with Mark Hurd, but it would only drag things through the court, may not even have been a winnable case (I am sure they consulted legal on this fact). I know that the sums involved seem like a lot of money to the average person on the street, but once you factor in the cost of having this saga drag on through the next CEO regime, and distracting HP from competing with the likes of Dell, Apple, Cisco, and IBM in the ultra competitive IT landscape. It makes for economic sense to just clear the desk as soon as possible and move on.

Remember, this isn`t your father`s HP, HP is the largest technology company in the world based on the all important metric of revenues, not market cap which is often based upon an overly inflated stock price with unproven revenues a la Bidu. So even if it comes as a $40 million dollar write-off, as a shareholder it is well worth it to get this ordeal done with in one fell swoop, and move on to the bright future that HP is positioning itself for in the technology space over the next decade. And make no mistake technology, and the productivity gains and quality of life enhancements brought about through technological innovation is what has driven American and global business growth for the last twenty years.

Static Chaos

Oil Espionage: Don’t Mess With China!

noreply@blogger.com (Static Chaos) — Mon, 5 Jul 2010 15:29:00 -0700

By Static Chaos

An American geologist-- Xue Feng--was sentenced to eight years in prison for gathering data on China's oil industry, as reported by the Associated Press today:

“[The] verdict said Xue received documents on geological conditions of onshore oil wells and a database that gave the coordinates of more than 30,000 oil and gas wells belonging to China National Petroleum Corporation and listed subsidiary PetroChina Ltd. That information….was sold to IHS Energy, the U.S. consultancy Xue worked for and now known as IHS Inc.”

While it is still unclear whether Xue actually committed the alleged act, oil industry espionage is hardly anything new.

Highlighting “cyberspies” are increasingly targeting strategically important businesses, The Christian Science Monitor did an in-depth report in January that at least three U.S. major oil companies were the target of a series of cyber attacks.

The “hacking” was aimed at the valuable “bid data” detailing the quantity, value, and location of oil discoveries worldwide. Oil companies typically spend many millions of dollars to find the next big profitable discovery. Other countries or competitors may very well save considerable time and money and gain a competitive edge, or advantage in a bidding war, by employing cyberspies to steal such valuable information.

Although the Monitor article suggested China could be the culprit behind the cyber attacks on the U.S. oil companies, there's no real evidence of China's involvement.

With the country’s economy consuming huge amounts of energy, China has been among the most aggressive in grabbing available resource base around the world. As such, it is probably not a surprise that China will be inclined to impose harsh punishment to anyone that Beijing perceives as undermining this endeavor.

Xue’s eight-year sentence is actually consistent with the four employees of mining giant Rio Tinto, including one Australian national. The four received jail terms ranging from seven to 14 years earlier this year on bribery and trade secrets charges.

The Associated Press said the U.S. Embassy issued a statement calling for Xue's immediate release and deportation to the United States.

Meanwhile, the NY Times described "American officials reacted with dismay and puzzlement" to the eight-year prison sentence imposed, which seems like a case of amnesia, since the U.S. is no stranger to the heavy jail terms typically handed down to spies, even in economic cases.

Nonetheless, this case does punctuate the global battle over scarce resources, and the wrath of China if Beijing senses a threat to its national interest.

Static Chaos

Offshore Drilling Moratorium: Hear It From The Little People

noreply@blogger.com (Static Chaos) — Thu, 1 Jul 2010 11:14:00 -0700

By Static Chaos

Hornbeck, a $400-million vessel company in Louisiana, filed a lawsuit against the administration on June 7, a month after the moratorium started.

CNN Money reports that Hornbeck, like many Gulf oil service providers, has one-third of its sales coming from contracting its 200-plus-foot vessels to provide transport services for deepwater drilling operations in the Gulf. Without drilling, vessels were sitting idle. While larger players may seek work in the international water by redeploying vessels and personnel, it is quite cost inhibitive for smaller companies like Hornbeck to pursue that route.

A dozen other Gulf-based businesses with more than 10,000 employees joined Hornbeck in the suit, while Louisiana governor Jindal also threw in his support. Their argument centered on the legality of the ban when many drillers met all regulatory requirements. Gulf of Mexico driller Diamond Offshore also filed a separate law suit against the Administration over the legality of the moratorium on June 17.

The Hornbeck case culminated with an injunction against the ban issued by U.S. District Judge Martin Feldman in New Orleans. However, no one is going back to work in the Gulf due to the lingering uncertainty. White House has filed an immediately appeal, while the Interior Dept. is mulling a "modified" moratorium.

Not surprisingly, a lot of hoopla is going around about Judge Feldman's stock portfolio. Various media reports indicated that Judge Feldman sold stock in Exxon Mobil Corp just hours before his ruling.

In reality, if we look around, almost everyone owns Exxon stocks in some shape or form through pensions, 401K's, mutual funds, ETFs, etc. since Exxon is a typical blue chip with nice dividend payout. The bottom line is that it would be quite difficult for anyone to extricate from the "Exxon stock association."

Last but not least, Exxon is like 20 times removed from the BP Macondo well explosion. The conflict of interest argument some are attempting to hang on Judge Feldman seems nothing more than a political ploy.

Meanwhile, this news video from CNN gives a refreshing perspecitve on BP and ofshore drilling from the regular working people in Louisiana.

Gulf to N. Atlantic: Computer Simulation of a Four-Month Oil Spill Flow

noreply@blogger.com (Static Chaos) — Wed, 23 Jun 2010 10:51:00 -0700

By Static Chaos

A video showing a computer simulation of the Gulf oil spill in four months, courtesy of McGraw-Hill Construction:

The National Center for Atmospheric Research in Boulder, Colorado, and collaborators, simulated the four-month migration of oil from the spill in the Gulf of Mexico by modeling how currents would move dye injected at the site of the spill for two months.

From the simulation, it looks the flow could go into the North Atlantic coast area. That is, the entire U.S. coast line could be at risk.

So, how long will it take for BP to pay (in monetary terms) for all this? Eternity seems a likely answer. ExxonMobil actually got lucky with the Valdez being a tanker with a finite amount of oil, instead of a live flowing well.

Static Chaos

Judge Who Overturned Drilling Ban Held Oil Stocks Back in 2008, So What??

noreply@blogger.com (Static Chaos) — Tue, 22 Jun 2010 14:44:00 -0700

By Static Chaos

The ink of the ruling against the offshore drilling moratorium is not even dry yet, the media is already jumping all over that Judge Martin Feldman is "greased with oil investments", says Mr. Christopher Helman, an Associate Editor of Forbes.

A "blog" at Forbes penned by Helman cited the NewsWatch Energy blog at Houston Chronicle that

"Judge Martin Feldman.....has owned stock in more than a dozen oil and gas companies, including two involved in the Deepwater Horizon disaster: Transocean and Halliburton. Feldman's 2008 financial disclosure report shows investments in gulf players Hercules Offshore, ATP Oil & Gas, Rowan Companies and Parker Drilling."

However, Helman forgot or chose to omit one pretty important paragraph from the same Houston Chronicle post:

"Some of those stocks were sold during the reporting period."

Furthermore, according to the "Update" section by Mr. Tom Fowler, author of the same post at Houston Chronicle:

"Some environmental groups are already releasing statements noting what appears to be a conflict of interest on the part of Judge Feldman.... However, a lawyer with non-profit public interest law firm Earthjustice told the Chronicle..that the organization did not ask for a recusal, nor did the issue ever come up."

So, in layman's term --NO, there's no evidence that Feldman still had those said stocks at the end of 2008, nor that he still holds them during the period of the moratorium hearing. And...YES, the environmental groups would love nothing more than to see Feldman recused on conflict, but were unable to raise it as a cause.

This renders the Forbes "blog" pretty much irrelevant in what appears to be an attempt linking conflict of interest to a federal judge, who happened to have ruled against the drilling moratorium on legal and constitutional ground.

In any case, even if this allegation were legit, it would have paled in comparison to the blatant conflict of interest by Matt Simmons' TV sensationalism.

Well, this is just one example of the sad but real picture of what has become of today's headline-chasing media and the so-called journalism.

Or could it be that since more and more reporters are becoming "bloggers" to drive web traffic, but still with the legal protection from their major media employers, this is a conspiracy to discredit the real blogosphere, who's driving them out of business? Just one theory....

By Static Chaos

Oil Spill Conflict of Interest: Matt Simmons Is Shorting At Least 8,000 BP Shares

noreply@blogger.com (Static Chaos) — Wed, 16 Jun 2010 18:34:00 -0700

By Static Chaos

After busy making several outrageous comments regarding BP and the Gulf oil spill as recent as last evening, Matt Simmons abruptly announced today that he would retire from the board of Simmons & Co.--the company he founded in 1974--effective June 30.

Meanwhile, Simmons & Co. also issued a statement in an apparent attempt to distance itself from its founder. As Houston Business Journal reports:

"..on June 14, [Simmons & Co] issued a statement dated May 12 in which [CEO Mike Frazier] distanced himself from the founder, saying that the former chairman’s views were not those of Simmons & Co. Frazier referred to Simmons' comments related to the Deepwater Horizon rig explosion and the implications for the industry and the individual companies."

You might recall in a Bloomberg interview on May 28, Matt Simmons endorsed the nuclear option as the only viable solution for the oil spill. later on, BP shares slid to a 14-year low, around the same time Fortune magazine (on June 9) quoted Simmons as saying BP had a month before it would file for bankruptcy. As recent as last evening in a CNBC interview (at around 6-minute mark) Simmons also intimated that the Gulf oil leak was at 120,000 bpd, instead of the official estimate of 60,000 bpd.

Being a devil's advocate, my suspicion only grew each day when Simmons seemed to have become increasingly "passionate" about preaching the worst possible outcome and solution (a nuke bomb? come on!) to this unprecedented disaster.

Well, say it isn't so, but according to Barron's,

"Simmons has a 4,000-share short sale on BP that he picked up when the stock hit $37. That’s in addition to a prior 4,000-share short sale he made at $48 a couple weeks prior. “It’s going to zero,” he says of BP stock. Mind you, Simmons has an interest and a deep investment in moving beyond fossil fuels."

The Barron's article went on to note that Simmon's Ocean Energy Institute, a renewable energy think-tank and venture capital fund he started in 2007, is involved in a project to develop off-shore wind power facilities and other alternative energies.

If Barron's assertion is true, it would appear that Simmons, an energy industry veteran and expert on "peak oil", could have had a serious conflict of interest when he went onto so many TV and magazine interviews talking his book about BP and the Gulf oil spill.

From that perspective, his remarks would seem irresponsible and only added to the existing despair and chaos, which is nothing the nation, particularly the Gulf Coast residents, need right now.

One has to wonder if this potentially unethical and maybe illegal act could have been easily deterred if only the media would require a disclosure before putting Simmons on TV and quoting him?

Static Chaos

Transocean CEO Does Bollywood At a Safety Meeting

noreply@blogger.com (Static Chaos) — Wed, 9 Jun 2010 13:46:00 -0700

By Static Chaos

I came across this clip on YouTube. According the video author, Transocean (RIG) President and CEO Steven Newman performed a dance--Bollywood style--at the company's 2009 safety review in Mumbai on Feb. 19-20 as some kind of reward/bet to Transocean's India Division team for wining "the best safety performance" in the company two years in a row.

You can tell Newman probably spent considerable time rehearsing. His performance, if ranked among his peers (i.e. the C-suite), would be at least 8 (out of 10).

There is also an awkward hip-hopish video filmed onboard Deepwater Horizon by two Transocean's rig workers to promote hand safety just a year before the rig explosion.

It looks like Transocean has spent much focus on transforming the blue-collar image traditionally associated with an oil serivce company. However, one has to wonder if the Gulf oil spill could be prevented had the same devotion been dedicated to the Horizon rig by Transocean (RIG) as well as BP.

Static Chaos

Paul Krugman and P. Diddy....Together In A Movie??

noreply@blogger.com (Static Chaos) — Fri, 4 Jun 2010 16:44:00 -0700

By Static Chaos

Yes, I'm talking about a cameo by the Nobel Prize winner, famed economist and New York Times columnist, Paul Krugman and Sean P. Diddty in an upcoming summer comedy with enough sex and drugs to kill a small commune--"Get Him To The Greek." (Trailer here, and I'm quoting from some of the movie reviews since I've not seen the movie.)

The story line goes something like this: An ambitious young record company executive (P. Ditty) attempts to transport an unpredictable rock star, Aldous Snow (Russell Brand), to L.A.'s Greek Theatre in time for his hotly anticipated comeback performance.

Critic's reviews are mixed so far. Below is one from MSN, so you'll get the idea.

"...Aldous is interviewed by Meredith Vieira, whose other guest is economist and New York Times writer Paul Krugman. Vieira and Krugman are stiff and slightly embarrassed and given the circumstances -- Hill has trails of vomit on his clothing by this point -- this is a sensible reaction. They probably signed on thinking this would be the next "Hangover" or "Pineapple Express." Not so much."

Since a moderator during a discussion at the London School of Economics once introduced him as "rock star", perhaps this is just one attempt of Krugman to cement that image. Or he probably thought it was a documentary about the Greek debt crisis.

I'm sure Krugman's MIT mentor Jagdish N. Bhagwati, who expressed his disappointment of his former student in a World Affairs article, would be immensely pleased with Krugman taking on a new Hollywood career.

I personally can't wait to see Faber and Roubini in a doomed Armageddon sci-fi flick.

By Static Chaos

Proof Media in Hopeless Moral Hazard When Forbes Compares BP With Goldman

noreply@blogger.com (Static Chaos) — Sat, 29 May 2010 13:23:00 -0700

By Static Chaos

When a major mainstream media like Forbes compares BP with Goldman Sachs and recommends investors to buy Goldman stocks, you know the world is in total moral hazard and deserved to be doomed as Marc Faber has always been saying.

Since Forbes is a financial publication, I will refute based on the investment thesis first. Granted both stocks are high risk plays right now, but I'd venture to say compared to Goldman, BP is obviously oversold and a victim of media hype and Whitehouse populist approach.

This conclusion is based on BP dividend yield (currently close to 7%), a strong average annual compound rate of return of 17.9% since 1977 vs. 10.7% from S&P, the growth prospect of crude oil and low forward P/E ratio of 5.64.

The in-depth Chart of Day story of BP on May 6 by Bloomberg (Chart below) should more than confirm my conclusion about BP stocks from a technical point of view.

Throughout its history, Goldman has been shortchanging retail investors by abusing its market position, which by the way, is put in place partly by the taxpayers' money. Sure, there were a few "official investigations" throughout the years, but basically went nowhere most likely due to the Vampire Squid's deep pocket, massive legal team, and far reaching influential tentacles into many related government agencies.

Now, the SEC finally brought a civil suit holding Goldman responsible for misstating and omitting key facts about a financial product tied to subprime mortgages as the U.S. housing market was beginning to falter. I will not go into the detail here of how Goldman knowingly contribute to the subprime crisis, which is the closet point of origin of the financial crisis leading to the current "Great Recession" and the current 9.5% jobless rate.

This is not to excuse BP for the Gulf oil spill mess. The environmental and economic impact has yet to be fully assessed. But one thing people seem to have chosen to ignore is that BP has paid and will be paying for a long time to come for this mistake ($930 million to date). But where is Goldman on this??

Almost 1,300 vessels are now involved in the response effort. Other oil companies are also helping BP in the Gulf including the world's top supermajor--ExxonMobile--by providing personnel and vessels. The entire oil industry will bear the brunt of the public outrage and is already working together to improve safety and engineering process and procedure to prevent any future similar incidents.

In contrast, posturing aside, Goldman is yet to even formally acknowledge any misdeed. The entire financial industry, instead of looking into self reform, is fighting tooth and nail with Washington on the proposed financial reform. Many are talking about setting up offshore shops to avoid the regulatory "burden".

Meanwhile, the swift regulatory backlash is coming down on the oil industry hard as we speak to "reform" the drilling safety standard, while a meaningful financial reform act is yet to materialize in our life time.

So excuse me for being more than outraged when Forbes dares to compare BP with Goldman, and the biased-agenda-motivated moral hazard the mainstream media have been brain-washing upon the public.

By Static Chaos

Goldman Shares Poised To Fall After Rising on False SEC Settlement Rumor

noreply@blogger.com (Static Chaos) — Fri, 21 May 2010 17:44:00 -0700

Since the SEC's probe, Goldman Sachs Group Inc. (GS) shares have dropped more than 20%, but reversed course on Friday rising as much as 5.4%. (See Chart)

Reuters reported market sources confirmed that the jump in Goldman shares was based on rumors, first reported by Zero Hedge, that the bank might be close to a settlement with the U.S. Securities and Exchange Commission (SEC) and because the stock is oversold.

The SEC has charged Goldman of creating and marketing a debt product linked to subprime mortgages crisis without telling investors that a prominent hedge fund helped choose the underlying securities and was betting against them.

While it is nice to learn that Mr. Blankfein told India’s Economic Times that he regrets participating in transactions that "brought too much leverage into the world," the posturing does not change the fact that his firm breached its fiduciary duty to investors, and knowingly unloaded the subprime crisis from Goldman's balance sheet onto the markets and taxpayers.

Meanwhile, for those basting in the euphoria of today's rebound in the financials, thus believing Goldman's shares are oversold, I'm happy to reiterate that the downward trend from the technical chart (see above) remains intact.